Cleveland-Cliffs Inc. (CLF) Q4 2007 Earnings Report, Transcript and Summary

Good morning. My name is Sheryl, and I am your conference facilitator today. I would like to welcome everyone to the Cleveland-Cliffs' 2007 Fourth Quarter and Full-Year 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 period. [Operator Instructions]. At this time, I would like to introduce Steve Baisden, Director, Investor Relations and Corporate Communications. Mr. Baisden?

Thank you, Sheryl. Before we get started, 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, which could cause results to differ materially. Important factors that could cause this difference are set forth in our reports on Form 10-K and 10-Q and news releases filed with the SEC, which are available on cleveland-cliffs.com. Today's conference call is also available and being broadcast on our website. At the conclusion of the call, it will be archived and available for replay for 30 days on the site. Joining me today are Cliff's Chairman, President and Chief Executive Officer, Joseph Carrabba; and Senior Vice President and Chief Financial Officer, Laurie Brlas. At this time, I'll turn the call over to Laurie for her prepared comments.

Thanks, Steve, and good morning everyone. I'll begin today's discussion with the financial review of 2007 and our outlook for 2008. After that, Joe will have some comments on our operation including a review for our development projects. Let's start with the fourth quarter highlights. Consolidated revenues of $783 million were up 43% compared with $549 million last year, benefiting primarily from the record performance delivered by our North American Iron Ore segment, up 41% to $618 million. We also had a $51 million revenue contribution from our new North American Coal segment. Consolidated sales margins increased during the quarter, due principally to an $83 million sales margin gain in North American Iron Ore. This was partially offset by higher cost in Asia-Pacific Iron Ore related to the weaker U.S. dollar versus the Australian dollar as well as a negative sales margin in North American Coal. Operating income of $139 million was up 52% from the comparable prior-year period and represented a quarterly record. Net income of $94 million or $1.77 per diluted share compared with $70 million or $1.33 per diluted share last year. The increase was principally due to higher operating income, partially offset by acquisition-related borrowing costs, increased SG&A, and the loss at Amapa. For the full-year 2007, consolidated revenues rose 18% to an all-time high of $2.3 billion, surpassing the record of $1.9 billion established last year. Revenue increases of 12% and 23% respectively from our North American and Asia-Pacific Iron Ore businesses and an $85 million revenue contribution from our met coal business acquired in July were the drivers of 2007 topline growth. Operating income of $383 million was up 2% from last year's record results, and net income was $270 million or $5.14 per diluted share compared with $280 million or $5.20 per diluted share a year ago. Turning to the results of our reported [ph] segments, North American Iron Ore pellet sales volume for the 2007 closing quarter was a record 8 million tons, up 37% from 6 million tons last year. The increase was due to contractual take or pay commitments as well as deliveries that were delayed from the third quarter due to customers’ blast furnace relinings. In addition, we recognized 1.5 million tons of sales for product that remained in stockpiles at year-end. No sales were recognized in the fourth quarter of 2006 for products that had not shipped. Sales margins for the quarter more than doubled to $154 million from $72 million in fourth-quarter 2006, reflecting the higher sales volume and lower per ton production cost. Per ton sales margin rose to $18.68 from the $11.86 realized last year, as revenue per ton was 6% and production cost declined 6% for the quarter, reflecting stringent cost management and benefits from our business improvement and Six Sigma efforts. For the year, our pellet sales volume was up 9% to 22.3 million tons compared with a year ago. Pellet sales margin of $398 million represented an increase of 22% from the $327 million generated in 2006, primarily reflecting the higher volume, a 3% increase in per ton revenue, and per ton costs that were essentially flat with last year. Per ton margins were then $17.88 compared with $16.08 in 2006. In the North American Coal segment, fourth quarter revenues were $51 million on 724,000 tons of volume. For the five months from July 31 or since the date of acquisition, the operation contributed $85 million in revenue on sales volume of 1.2 million tons. Sales margin was a loss of $16 million for the fourth quarter and $32 million for the five months. This was primarily due to a lack of leverage of our fixed cost resulting from production slowdown. The Pinnacle Mine was down for several weeks while we repositioned the longwall plow system. In addition, at the Oak Grove Mine in Alabama we took time and resources to invest in business improvement and safety initiatives designed to enhance future production. Revenue per ton price realizations of $67.72 for the three months and $70.83 for the five months were more than offset by per ton unit production cost of goods sold and operating expenses of $90.98 and $97.84 respectively. Joe will talk more about the production challenges and give you an update later on in the call. In our Asia-Pacific Iron Ore business, we reported product sales volume of 1.9 million metric tons during the fourth quarter of 2007, up 15% from last year's comparable quarter. This was primarily due to timing as we had a shipment go out just after quarter-end. Sales margin was $24.7 million versus $25.8 million in the 2006 period. Per ton sales margin was $12.82 for the three-month period versus $11.41 last year. Negative impacts on our cost included foreign exchange rates as well as higher maintenance and contract labor expenditures. For the full year, volume totaled 8.1 million metric ton, 10% higher than a year ago, due primarily to last year's 2 million ton per year expansion at Koolyanobbing. Sales margin of $96 million represented an increase of 11% from the $87 million generated in 2006. Sales margin per ton was $11.76, up just a little bit from last year's $11.56. One unusual item this year was our changing out of our mining contractor, which did somewhat impact our cost. Now, I would like to spend a couple of minutes on the result for Sonoma and Amapa. Despite the rains, we expect to begin shipping coal from our Sonoma Coal Project in Australia very soon. We have a 45% economic interest in this project, and our P&L will reflect revenues and costs for that 45% interest as we get moving. The balance sheet will show 100% of the washplant assets as we own it in its entirety, and then we'll have the percentage ownership for the other assets reflected on the balance sheet. For the quarter and year, we incurred losses of approximately $0.5 million and $2 million respectively. In January, we also began production at our Amapa Iron Ore joint venture. Our interest here is reported below the line as an equity from ventures, and our reported loss for the quarter was $8 million. This was primarily driven by the fact that we're still in the pre-production phase. Turning to the balance sheet, at year-end, we had 3.4 million tons of pellets in our North American Iron Ore inventory compared with 3.8 million tons at the end of 2006. We had 133,000 tons of coal in inventory at year-end and the Asia-Pacific group had 1.1 million tons of finished products versus 854,000 a year ago. At year-end, we had $157 million of cash and equivalents on hand and we had $440 million outstanding under our $800 million credit facility. A year ago, we had $352 million in cash and no borrowings at year-end. For the year, we generated $296 million in cash from operations. We used that cash for things such as the $503 million to purchase the PinnOak properties and $206 million for property, plant and equipment, which does include our share of the Sonoma capital expenditures of $84 million, and then we spent $181 million on various ventures including the $160 million related to Amapa. In the fourth quarter, our Board of Directors approved a 40% increase in our regular quarterly dividend, which brings the annualized dividend to $0.70 per common share. In 2008, we're expecting capital expenditures of about $200 million. Breaking that down, you'd expect to see about $70 million in the North American Iron Ore group, about $40 million for Asia-Pacific Iron Ore, $70 million for the North American Coal, and about $10 more million for our share of Sonoma CapEx. In 2008, depreciation and amortization is expected to be about $170 million. Now, turning to the pricing outlook for 2008, there have been recent reports of settlement at 65% for iron ore find increases, and we've assumed that in developing our outlook for iron ore sales. But I'll have to remind you that negotiations are still underway and there may be some other settlements for finds, and in addition pellets in lump may settle at different levels than that. But given that assumption, the approximate per ton sales prices for 2008 that we would project are North American Iron Ore $76, North American Coal $91, Asia-Pacific Iron Ore $88, and Sonoma Coal $82. In estimating the North American Iron Ore revenue, we made a variety of assumptions for all the different factors included in our supply contracts. These include the 65% increase in ore price that I mentioned. We've also assumed modest increases among our producer price indexes that are included in the contracts and about a 16% increase in hot band steel pricing. There are a number of other factors in our contract such as contractual base price increases, lag year adjustments, and the results of capped pricing in some of our contracts, and all of that together figures into how we computed the overall average. If you wanted to look at some sensitivities on some of the key factors there, it's 10% change from the 65% we use in the world pellet price, which changes our average realization per ton by $0.66. Each $10 change from the $650 per ton in hot rolled steel that we assumed would change the price by $0.25 per ton. The Asia-Pacific projection we used reflects the assumed 65% increase, and in addition our 2007 revenue reflected approximately $3 per ton in hedging gains that we assume won't repeat. Our met coal revenue projection is based on the contracts we have in hand for 2008. Cost per ton for 2008 for our operations are expected to be approximately $50 for North American Iron Ore, $77 for North American Coal, $53 for Asia-Pacific Iron Ore, and $78 for Sonoma property. As we've said, we expect our North American Coal cost to decrease sequentially throughout next year and probably by the end of the year we would be at a run rate that is in the neighborhood of 5% or less than that. At Sonoma, we should keep in mind that as it's the start of the year, the stripping ratio is much higher. There’s probably 10% to 15% in that cost for that higher pre-strip ratio that would improve in following years. Based on the current delays in production levels, we do expect our Amapa venture to incur losses in 2008. Given all that, we expect to generate about $650 million in cash from operations next year. And on that note, I'll turn the call over to Joe.

Thank you, Laurie. I'll start my comments today around the operating performance of each of our segments and conclude with an update on our development projects and my thoughts on our performance in 2007. Cliffs achieved equity production in North American Iron Ore of 5.4 million tons and 21.8 million tons for the quarter and year respectively. This was up from 4.9 million tons and 20.8 million tons for the year ago. North American Iron Ore highlights during 2007 included United Taconite and Hibbing operations returning to full production early in the year. If you remember, in October of the previous year we had had an electrical explosion at United Taconite, and in Hibbing we had freezing problems and a lack of water to run the mills during the winter period. Our continued progress for restarting the idle furnace at Northshore is on schedule. It is expected to add about 600,000 tons of pellets of production in the current year and about 800,000 tons per year thereafter. And as previously announced, the deal to sell Wabush, which is our highest cost operation in non-core assets, to our existing North American Iron Ore portfolio. In 2008, we expect to produce over 31 million tons of pellets, which includes first quarter production at Wabush. We are currently projecting that transaction to close in the first half of the year. We estimate Cliffs' share of pellet production in 2008 at 21 million tons with sales volume of 23 million tons as we sell down from our inventory. At our North American Coal operations, Duke Vetor and his team haven't wasted any time in implementing Cliffs’ proven production methodologies and processes. Normal production has resumed after the slowdown at the Pinnacle Mine, and in 2008 we expect to produce and sell an estimated 3.1 million tons from the Pinnacle complex and 1.4 million tons from Oak Grove. Combined, this will result in sales of 4.5 million tons of met coal this year. Nearly all of our production is under contract at an average price of $91 per ton. I just want to make a comment on Oak Grove. Duke and his team again have made significant strides down there in the latter half of the year and certainly early this year, particularly in the areas of safety and in staffing, which we were really... we are really poised to make some big improvements down there. The capital spending that we've discussed of $70 million in North American Coal is heavy. We need to bring these assets back up to Cliffs’ standards and we will see those improvements really starting to take place when the capital is spent and in the second half of this year. On our coal pricing, we started out the year with a new business with a philosophy for... on 2008 production. It was not to commit… it was to commit very early in the cycle in that there was a lot of nervousness around the cycle and where the tonnage was and was also to secure the volumes that… I think more importantly that we could supply and make sure that we could maintain our reputation around being a full supplier on those products. I think it is important to realize that Cliffs is a new player to the met coal business and we think that in the long-term it is extremely important to establish ourselves as a reliable operator and supplier of… and a long-term partner. As such, with our past production problems at Pinnacle, securing $400 million in sale and $100 million in EBITDA is what we promised. This is the imparity for 2008. And I'm quite confident that our team will be successful in that. In Asia-Pacific Iron Ore, we produced 2.1 million metric tons for the quarter and 8.4 million metric tons for the year compared with 2.2 million tons and 7.7 million tons for the respective periods a year ago. In 2007, we also completed our changeover to a new mining contractor. The new company has incentives in place to control cost as well as economic participation in any improvements. With the changeover related cost… while the changeover related cost had a negative impact in the last quarter of 2007, we believe this will resolve in a greater cost control in the future. In 2008, Asia-Pacific Iron Ore has… is expected to produce 7.89 million metric tons of fines and lump ore with sales of 8 million metric tons. We also recently announced a $23 million exploration program at our Koolyanobbing operation. This program is targeted at expanding our iron ore reserve base in Australia, to increase the exploration coupled with studies of existing technologies to beneficiate the lower grades ores that exist on the properties, and a study into the increasing and.... throughput for the capability for the rail and the port, which is the major bottleneck for any expansion thoughts we may have. Now, let's turn to the development projects. Our Sonoma Coal project is scheduled to commence shipments in the first quarter. While we were fortunate to have little damage in the first round of torrential rains in Australia last week, we were not so lucky. Due to the severe flooding throughout the Bowen Basin, there has been a delay in shipments that were previously scheduled. Prior to the flooding, Sonoma was on time and on budget, which is a remarkable feat in Australia given the current environment. Fortunately for us, this is a shallow pit. We're just starting the stripping and getting down to the coal. So there was no equipment damage linked with the flooding, it's just the matter of getting the pit dried out after the rain has stopped to get production restarted again. We now expect total Sonoma production to be approximately 2 million tons in 2008, and nearly equal amounts of hard coking and thermal coal. While the rains have created a tough environment in the short-term, we believe we can quickly recover and expect Sonoma to be a great project. As many of you know, our Amapa project received a huge vote of confidence last month when Anglo American announced its plans to announce MMX's f majority ownership stakes in both Amapa and Minas-Rio. Amapa began production in late December. MMX has managed… has management control over the venture and has indicated plans to complete construction of the concentrator and ramp up operations during 2008. Based on concentrator startup delays and new production estimates of 3 million tons to 4 million tons this year, we expect to incur significantly… significant equity losses this year. However, MMX expects Amapa to produce at the 6.5 million ton design level in 2009 and beyond. While I would like to be more specific on the timing and losses of the project at this point in time, we're still assessing the startup and the final project cost as the concentrator project comes to a close, and once we have this information we will be happy to pass that on. But I do need to remind you that we are in the middle of a management change from MMX to Anglo, which we think is a very positive effect on this project, and also that we are the minority partner and MMX is the majority and the managing partner of this business. Before we take your questions I would also like to close with a few thoughts on 2007 and our prospects for 2008 and beyond. Focused execution on our strategic plan has put us well positioned to take advantage of unprecedented demand for our products. 2007 ended on a high note with new revenue records for both the fourth quarter and full-year and profits of more than $5.00 per share. We keep focus... we kept focus on our core businesses achieving North American production targets coupled with impressive cost containment. Our Asia-Pacific business, reflecting Asian steel makers’ robust demand for iron ore, operated near capacity producing more than 8 million tons. 2007 was also a period in which we entered Latin America through our interest in Amapa, and began mineral diversification with our interest in Sonoma and continued this diversification with the acquisition of our North American met coal operation. Today, Cliffs is a very different business than it was a year ago, and we expect to further our strategic transitions into the global mining company as newly acquired interests mature and we identify and execute new opportunities. In 2007, we surpassed the $2 billion in revenue mark and we expect to surpass the $3 billion revenue mark in 2008. In addition to our focus, our investment opportunities in iron ore, metallurgical and thermal coal, we are not ignoring opportunities outside of these areas that could enhance or expand our position as a raw material supplier to the steel making industry or other opportunities that may become available. Plans to build up on Cliffs’ unique technological expertise in the area of concentrating and processing lower grade ores into high-quality products include our agreement with Kobe Steel forged during 2007. We intend to construct a commercial scale plant capable of producing 500,000 tons of iron nuggets per year at our Empire Mine, with production expected to commence towards the end of 2010. Our strategy was reinforced in 2007 by the macroeconomic factors in the industry and the results we were able to achieve. Our long-term adjectives remain on track, and we anticipate another very good year for Cliffs in 2008. And with that, I'd be happy to take your questions. Question and Answer

You first question is coming from David MacGregor of Longbow Research.

Yes. Good morning, everyone.

Good morning, David.

Hi, David.

Hi, David.

Just on the Amapa, I guess to a certain extent this is a difficult undertaking because you're trying to provide guidance based on guidance you're receiving, but...

Very well put, David.

Just… so it’s guidance on guidance, but is it you sense at least… I realize the quantification of losses is yet to be determined, but is it your sense that from this point forward the quarterly P&L burden could get larger, or do you get the sense that we’re kind of constrained at these levels and we just might not be going lower for a while?

Well, I get the sense. The project is basically constructed. We're going through the pre-production phase of starting the motors and going through the metallurgical balances and things like that. So the bulk of the expenditure is though. However, I don't think the volume will come on in the first quarter to really see the relief that we would have been happy to have seen if this had come on a little bit further. So I know that's... it’s not a lot to answer your question, but we’re through the bulk of the expenditure in the construction. We haven't had surprises. It's just every thing in the mining business, David, right now with projects that are as remote as this, and we're still going to be very pleased with the product when we end. And when we get better numbers and can get our… get focused on it, we’ll be happy to report back as soon as we get that.

And it will certainly be this things where the second half of the year would be better than the first would be the way we would expect it, because it is ramping up.

Second half better than the first.

Yes.

Okay. On the pricing, I guess you've got caps and collars, everybody’s known for years that caps and collars are in there, it's just nobody has any sense of the magnitude of those caps and collars. How much can you share with us on the extent to which pricing in 2009 will benefit from the sea borne price settlements in '08?

Most of the contracts... the duration of the contracts that we currently have, their average is seven years, David. They’ve come on them. We have no significant contracts that I can think of that are really coming up that they are going to change these factors at this point. So the guidance that we have given on the sensitivities around the different factors in our contracts will be valid for '09 as well.

So… I mean you’ve got a 65% settlement in the in the sea borne market. It looks like you're going to get about half of that, and… so I guess I'm wondering does the balance accrue to '09 or just get dispersed over the balance of the life of the contract?

It goes through the... well, it's an annual adjustment that we take back from the beginning of the contract on an annual basis. I'm not sure that it carries forward more than what the next annual--

And some… they are different, so some of them if you don't recoup it this year, you might recoup it next year, but others would start out, so it's been... in '09 you had another 65% price increase, you look at on a totally fresh basis and the challenge is that they are all different.

Yes. And just... we are hitting the best iron ore markets ever, and I guess the question is, is Cleveland-Cliffs participating or not, and the answer is they do participate, but the benefit gets sort of distributed over a couple of years rather than one year. That's a different answer from they don't fully participate, and I’m just wondering how you... that question--?

I think probably the answer might be, in between those there's going to be some... as we've said, these contracts are going to mute the volatility.

Right.

And it's interesting because everybody seems to forget the... what the expectation for pricing increases were. Just a year ago, nobody ever dreamt that it will be 65%. So the contract looked fabulous at that point in time. But the goal here was to reduce the volatility. So you're not going to have a significant of increases or decreases. So you’re narrowing the band and over time and as they come up for renewal, we look to move them to market pricing, but it takes a little bit longer and it's going to be a little slower.

Okay. I'll let some others pursue that. Just on the SG&A, a big increase, I guess that was the stock price movement or was there something else in the SG&A?

No. We’ve put a lot into business development, particularly in South America where we put an expat office as you know primarily in Rio and we are spending quite a bit of time looking at prospects in Brazil primarily but throughout South America at this point in time. And the expansion that we have with coal business with PinnOak coming in under the fold and then--.

Yes, PinnOak brought it down [inaudible] SG&A because we didn't really have PinnOak coal organization.

Laurie, what should we use going forward from a modeling standpoint for the SG&A?

We had about 150 that we put in the press release.

150.

Yes.

Okay. Thanks very much.

Thanks, David.

Thank you. Your next question is coming from Michael Gambardella of JPMorgan.

Yes, good morning.

Hi, Mike.

Good morning.

Hi, Mike.

I have a couple of questions. Just wanted to follow up on the price... North American pricing, because first of all the steel component, up 16%, that you gave last night in the guidance...

Yes.

Hot roll prices are up more than 35% from the low [inaudible] April. And I was just wondering how you are getting to the 16%?

Well, it’s a year-over-year average-to-average. So we're going to be wrong, I am sure of that. So that's the one thing that we can say. But it's a full-year average of our full-year average. So the '07 would have had some benefit from the fourth quarter increases, and then we are... what do you project that it is going to stay at for the full year, so that's... and as I said, we used 650 for this year. So you can adjust it as that you think, but--

And then, on the pricing, it seems like in North America, in the 10-K, I thought you… it says you have one price cap contract, not multiple contracts that had price caps.

We do say that there is one contract that has cap, Michael, but we also say that there is lag-year adjustments and contractual base price increases. So all of those combined have the combined impact on the average price that we put in the press release. So we try to give you some sensitivity to all of those factors combined. Each of the contracts are different.

Right. Can you--.

So, it's hard to tell--.

Can you explain what the base price contracts are and what the lags contracts are?

You mean which customer has which--?

No, I know you're not going to probably say that, but can you just explain what base contract means what lag contract means?

So in some of the contracts there might be a fixed adjustment built in, which will be a base price adjustment. In other contracts, there is something that’s not... it has more of a time lag before the increase kicks in.

How much of a lag?

It's going to vary.

It's going to vary, Mike, all over the board.

Just because with the guidance that you gave last night on getting to the 15% increase in North American Iron Ore, I just did back-of-the-envelope and I said, look if Mittal who is your largest domestic buyer at around... I think around 44% of your North American business, even if Mittal had a cap and got absolutely no price increase and you worked through the numbers that you gave, you come up with a 19% increase, not a 15% increase in iron ore, and I doubt Mittal is getting no price increase. So I'm just having a hard time figuring out how you can get through a low of 15% increase other than being just ultra-conservative?

Mike, it’s very difficult to give you a better explanation without divulging confidentialities around certain contracts and negotiations that we are having with customers within the confines of that contract. This is the best we can represent it on a generic basis, if you will, as we blend the averages and I just... it's hard to go beyond that without destroying the confidentiality of the customer.

Could you say like in '09 if you had a 0% increase in the global price, 0% increase in steel prices, 0% in the PPI, what would your North American Iron Ore price do in '09?

It’d go up.

By how much?

I’ll have to do some homework on that, but I know that... based on the agreements it’d will go up.

Yes. Mike, if you go back two years ago, if you remember when there were iron ore price increases, there was actually a pellet price decrease of around 3% to 3.5%, I don't remember exactly what the number is, and with the effects of our contracts that year our pricing actually went up in the high-single digits, again if I remember right. So from the negative of not enjoying the full pricing implication of 65%, we also did… enjoyed positive year-end price increases in just two years ago in this robust market with those factors. And let me remind everybody once again that the pellet price has not been set yet at this point in time and our assumptions are based on the 65% fine settlement with the Japanese mills with one supplier.

And let me... I went back to 2005 where the pellet price was up 86%, but steel prices were down 10% year-over-year, yet your North American price for pellets was up 33.5%. It just seems like since '05 you must have changed the contracts somehow?

There's been a lot of different contractual negotiations with Mittal. If you remember, when Weirton closed there were different changes in there and we're constantly working with customers on contractual arrangements. I don't know the specifics from '05 to now, but again we're giving the guidance as best we can with the facts we have in hand with the current contracts.

Okay. And the last question, on the coal side, you reiterated the guidance that you gave earlier about 4.5 million tons for 2008 in terms of shipments. What run rate had you been operating at, say, recently… in this year and maybe the end of '07 versus that 4.5 million ton estimate?

Well, right at the end of '07, we were coming into those run rates quite comfortably, particularly at Pinnacle, with the move of the longwall and we were back at rates. We have struggled a bit down in Oak Grove, again getting through the safety piece first making sure we had the safety in place. We'll have held some ships back for training and have done a lot of cleanup in that mine to get forward. It's lagged somewhat behind, but not that far. So I guess--.

And we had 750,000 in the quarter and we certainly ended the quarter at a better rate than that because in October we still had the longwall. So we’ve probably ended the... we've probably started the New Year at about 1 million ton run rate.

Yes.

And if you ship over 4.5 million tons in '08, does that incremental tonnage get priced at the spot rate and in what price is that?

Yes, sir, it does, and I probably heard as many rounds of speculated prices as you have. And that tonnage did get released to the spot market. It would be much later this year because again, as I said, we want to make sure that we fulfill our contracts this year. Pinnacle has been… and Oak Grove have both been sporty on customer reliance. So it would be later in the year, Mike, and you hear everything that I do of the plus $100 to even now the rumors of $200 a ton. But certainly it would far exceed the $91 average that we have now.

All right. Thanks a lot, Joe.

Okay.

Thank you. Your next question is coming from Jack Franke [ph] of Duquesne Capital.

Michael, just one follow-up on Mike's question and on the coal pricing. Are you starting to see any contract offers for 2009 tonnage?

We haven't really solicited them. I'm sure we could go out at this point in time, Jack, and get '09 contracts if we wanted to. But again, we wanted to get… we wanted to get the year off right. We wanted to make sure we had our new contracts in place and we’ve really have been new to this business. We want to put some pretty good strategy around what we want to do in the outer years before we get started.

Understandable. Are you seeing new customers come with proposals and any sort of market prices?

I don't know that there are new customers out that are coming forward and really we haven't push to engage customers about '09. So I don't know that they're coming forward with proposals at this point in time. I think it's probably more appropriate that we come forward with proposals to the customers.

Okay. And then I have a question as I think everyone does on the '09 and '08 pricing for the North American Iron Ore. And given that pellets here could be at 125 and we're selling them at 76, which is quite a big discount, could you guys give us a sense or maybe a press release on the next quarter, what the ' 09 price increase would be without any increase in any other of the PPI steel prices of iron ore, and just so…? So I think it’d be helpful for shareholders to understand what the lag effect is here.

We'll look into that.

And then just give us some more clarity on the lag effect and have the--.

Yes, we try very hard not to be mysterious, believe it or not, and we will certainly look in to that, and any future guidance we can give in to '09 we would be happy to do it.

And you don't have to make any assumptions on steel PPI or iron ore increases because I think we can do that, but just it’d be very helpful with the lag effect and how the pass-through works?

We will give it a hard look and come back to you.

Okay. Thank you.

Thank you.

Thank you. Your next question is coming from Meredith Bandy of BMO Capital Markets.

Good morning, Meredith.

Good morning.

Hi, Meredith.

Hi. I guess just to change gears a little bit, you guys guided to a pretty significant cash flow from operations in the coming year, and even including your CapEx budget it seems like you are going to have quite a bit of cash. Could you talk a little bit about your top choices and uses of that cash?

Yes, we’re… definitely a better strategy is growth, and our first objective would be to look for opportunities to grow the company. We did quite a few things in that arena in '07. Given if that's not feasible we would look for alternative ways to return the cash to the shareholders, be it a stock buyback or a dividend increase.

Okay. And… I mean would that be a near-term decision in terms of what's feasible and what's not? And are you seeing a lot of opportunities that you like or...?

There is always opportunities, Meredith, but not so many that we like. Things are… as you know, are very expensive at this point in time. So they’ve really got to have the strategic bend that go along with it that we can grow our businesses and our platforms as we go out. And it comes to certainly nobody's surprise that with where the debt and credit markets are right now, it's going to be difficult for some time to work on these. But, yes, we continue to be aggressive in our looks, in our thoughts, and in our analysis, but it is a tough time in the cycle to pull something off.

When you think near-term… generally speaking, our first quarter is at lowest cash generation quarter, so it's not something that you... I would expect something to happen in really quick [ph] months.

Okay. Thank you.

Thank you. Your next question is coming from Tony Boase of FAF Advisors.

Thanks.

Good morning.

Hi, Tony.

Hi. Just wondering whether you could remind us of what the proportions are on your North American contracts between iron ore pricing and the PPI and hot rolled pricing, because it looks like you may be only kind of [inaudible], but if you just use 25% for each of those, you are only… 65% jump in sea borne only gets you about a 10% contribution to your pricing, and I know people have thoughts about caps, but… I'm sorry for the ramble, but I guess I'm kind of wondering why you even need caps on your contracts, if you’ve got this formulaic approach to your pricing anyway.

Well, the formula is going to say… again, I'm sorry for repeating myself, but they are different. The formula is gong to say something like 25% of this PPI plus 25% of that PPI plus 25% of world price plus top band or whatever they are and they add up to 100%, that calculates your price increase. And so... and then, generally the most logical… they are kind of a third, a third, a third, where the world piece is about a third, the cost component pieces are about a third, and the steel related type things are about a third. But if your mix changes or you trip into one of these other clauses you can have other impacts, but that you can't just take the math and do it on a macro basis.

I would also add to… say that the comment on why do you need caps, some of these contracts are the contract with caps on, certainly came right before or right at the time when these extraordinary prices came on that nobody ever really thought we would see 86% and 65% price increases. I think the other… the tradeoff of that I think people need to continue to be reminded of that is usually where there is a cap there is also a floor, as you saw in our press release in our fourth quarter, a lot of that tonnage protected that way. And with where the U.S. economy is right now, by the third or fourth quarter, that might be a very valuable component of this contract.

Just to follow-up on that comment. Do you really think you need a floor in this environment? I mean we were just talking about not too long ago in this call about there being a catch-up effect in '09 and now you are talking about you might need a floor, I'm not quiet following that.

The floors were built into the contract at the time that they were written and it's... since I have only been in this industry for a year it's kind of easy for me to remember. A year ago at this time, people were projecting flat-to-down prices for '08. And so now it's turned around to be 65%. So it's a very logical contract from that prospective, and for the experts to go from predicting flat-to-down to it turn outs to be 65%, obviously there is a significant amount of volatility.

Right.

And just on the coal pricing, I mean I assume those prices would change into '09 --?

Yes, absolutely. Those are only one-year contracts and they would be reset… the pricing would be reset in '09.

Okay. Thank you so much.

Thank you. Your next question is coming from Mark Liinamaa of Morgan Stanley.

Hi all.

Hi, Mark.

Hi, Mark.

Most of mine have been answered, just quickly though for clarification, 65% assumption on pellets, is that just to not make a statement on what you might think it would be or do you actually expect just the premium over lump and fine for pellets is going to increase again this year?

That's to not make a statement. We don't presume to guess. It was the only... you’ve got to put something into calculation and it was the only factual resource number we could turn to.

And do you have any insights into the relative tightness of pellets versus direct ship lump fine?

Pellets are extremely tight, Mark. Around the world, there is even discussions of actually starting to ship pellets out of the Great Lakes. You may see some of those pellets being shipped this year by other people, which is just extraordinary, but it's... they are in very short supply right now.

Very good. Thanks very much and good luck.

Thanks, Mark.

Thank you. Your next question is coming from Justin Bergner of Gabelli & Company. Justin Bergner - Gabelli & Company, Inc.: Good morning, Joe and Steve.

Hi, Justin.

Good morning.

Hi, Justin. Justin Bergner - Gabelli & Company, Inc.: My question concerns the North American Coal pricing. Specifically, there hasn't been a lot of clarity regarding the contingent earnout that was part of the initial purchase, which ranged from 0 to 300 million. I was wondering if you could talk about whether or not that would be payable based on the $91 and 4.5 million tons in 2008? And if so, is it payable out of those numbers or is it accounted for differently, how is it accounted for?

Yes, the calculation covers 2008 and 2009. So at the end of that point in time this one we would be able to be certain as to what it is. And we expect that if we pay it that's a good thing. And these rates certainly are getting us to that level. Justin Bergner - Gabelli & Company, Inc.: Does it get you to the level where you payout based… if you do $91 and 4.5 million tons will that lead to a contingency?

Yes, assuming '09 continues on that same trajectory, yes. Justin Bergner - Gabelli & Company, Inc.: And would that not be accounted for until cash flow in 2010?

That would be purchase price accounting, so not to get too accounting technical, but it goes on the balance sheet and goes into the valuation and becomes goodwill or an adjustment to the asset value. Justin Bergner - Gabelli & Company, Inc.: Okay. Can you give us an estimate as to how much the $91 and 4.5 million tons would add to the contingent earnout as it relates to the 2008 portion?

It's really... it's a two-year earnout that... that the whole thing is calculated over the two-year period. So I don't think we are really prepare to speculate on '09 yet. Justin Bergner - Gabelli & Company, Inc.: Okay. And then also on the coal pricing, is the $91 per ton reflective of contracts that begin in kind of April '08 and roll over March 31st, 2009 or what type of terms have you been pricing the tonnage at… to that $91?

Yes, Justin, it is an April-to-April contract adjustment like most of the coal business. Justin Bergner - Gabelli & Company, Inc.: Okay. So the actual price that you have for contracts beginning April is higher than the $91, I would assume?

Yes.

Yes, but… and that’s because January 1 to 12/31, so there is a little bit of mix. But $91 is overall average but you are correct in where you are going that the contracts that are April-to-April are most likely at a little bit higher price than that. Justin Bergner - Gabelli & Company, Inc.: Okay. And what percentage of the 2008 deliveries are domestic versus export?

60% export and 40% domestic, Justin. Justin Bergner - Gabelli & Company, Inc.: Okay. And are the domestic contracts one year or are they longer than one year?

One year.

One year. Everything we have is one year and we have nothing committed for '09. Justin Bergner - Gabelli & Company, Inc.: Okay, great. Thanks for the clarity.

Thank you. [Operator Instructions]. Your next question is coming from David MacGregor of Longbow Research.

I’d just like to come back the second time with some follow-up questions on exit operations. At Portman, your pricing seemed to be awfully good this quarter. You were up 22.5% year-over-year. Was there a mix issue there or was there something else going on?

David, we are going to have to look at that one. I don't recall it. Portman… I mean there is a little bit of mix in the pricing, but nothing of that significance.

It was a nice delta. The currency hedged $3. Have you stopped currency hedging or… what's the change?

No, it's... we continue the currency-hedging program at Portman. It's just that... depending on how timing falls and where the currency moves… I don't like to assume that I am going to get currency gains. So you can assume that, I guess, if you want to, but I don't put that into the numbers.

Okay. But has anything changed in terms of sort of the protocol, the hedging program?

No, our program is very much in place and run by the treasury department over in Portman and I think is very much right in line with policy.

Okay, good. The impact of the change in mine contractor, how much was that on the quarter's P&L?

Less than $10 million, David, in the switchover.

$10 million?

Yes.

And should there be any carryover impact into this quarter?

No. It's done. There might be few dribbles, but nothing of significance.

Okay. On the coal business, can you update us on the domestic market development? I know you've got a decent export opportunity right now, but how're you doing on developing domestic customers?

Very well. I think it's really… at this point in time it's up to us, if you will, to really set the mix and the risk factors around export versus domestic use because there is a… and I think in the outlook in the years, there is a lot of [inaudible] expansion going on with the latest announcement in the press I think a week or two ago on the Toledo expansion and U.S. Steal is… with the right permitting is going to invest a lot of money back up at Clarion. So, there is a… it's a pretty bright future both domestically and certainly on the export side.

You recently talked about coal sales mixture in the mid to high 90s, now it's 91. Has something changed?

Certainly. You mean for… in the world or you want me to--?

For your coal sales we had originally talked about mid to high 90s and now you are saying 91. I'm just wondering if something has changed there.

I don't remember that statement.

I think... David, I think we've been at the low 90s. We had 70% of our production for 2008 booked at one time and we continue to book it, but there may have been a little bit of change there. But I think we've been at the low 90s number for a long--.

And just lastly, Northshore, you have got 600,000 tons expected in '08, roughly 200,000 per quarter I guess on a linear distribution. What should 2Q be? Are we going to get to 200,000 tons in 2Q?

No. That start-p will be in April.

Okay.

So … but I think you can take it--.

Take it from there.

Ramp it from there.

Okay. Thanks very much.

Thanks.

One more question, if I may.

Sure.

If I’ve still got you. 2009 Pinnacle CapEx, you’ve got a fairly substantial capital program going on in a way, but what ultimately ends up being capital spending in '09?

That's going to be a pretty heavy year as well because we are… and it was always in the plans to replace the longwall.

Yes.

If we can get the delivery of it. A lot of the capital you see this year will be in the money we need to advance to preorder the shields. These things are running 18 months to two years out and there'll be a large capital investment in the longwall at Pinnacle.

[inaudible] we may be investing and not as well with [inaudible] '09.

No, it is… you are putting in a longwall at Pinnacle and at Oak Grove, do you have two longwalls?

We do, but they are not all in '09. One is in '09 and the next is in '10.

Okay. Thanks very much.

Yes. Sure.

Thank you. Your next question is coming from John Tumazos of John Tumazos Research.

Good morning, John.

Good morning.

Hi, John.

Congratulations on everything. Could you elaborate on the big divergence between your U.S. and Australian rate of change in iron ore cost, if there is anything besides currency and wage rates such as strip ratios or different reagent costs? Second, concerning MMX, it's possible that Anglo has a bigger view of things than your prior partner. What are the logical increments to expansion in 6.5 million ton capacity? Would it be just doubles, triples, quadruples, or what would the increments be?

Yes sure John, I can. On the first one, the difference between North American cost containment and Australia is, primarily in North America, number one, the mining businesses isn’t as robust as Western Australia is that… where labor is very expensive and very scarce to get as well as supplies. Also, we control our own labor forces in North America. So we've implemented some very strong business improvement techniques that we can control in Australia as you know and certainly with Portman most of that business over there is contract mining and almost the time and materials are cost plus basis at this point in time and inflation, as hard as we try and hold it back like all the other mining companies in Australia, is extremely difficult with contractor rates. I mean acceleration of diesel fuel, everything out there is run on diesel fuel including the power plants for the most part, and the labor shortage, so labor rates are going through the roof at this point in time, just less controllable contractors.

Also the exploration program that we've got going on at Portman will calculate into the cost per ton. So that's something that we wouldn't have in North America.

That is right, and of course you can't forget the currency exchange that continues to drive everything over there. So Australia is a tough operating environment as far as cost containment for everyone. Turning to Amapa there is... there is kind of two stages in this thing. The footprint was built on the concentrator to expand pretty easily out from 6.5, I would say probably comfortable in the 9 million ton to 10 million ton range by dropping another million in there. However, this is going to be followed first with some pretty good infilling on the exploration in the area. We are just getting this mine started up and we need to really get that resource under control first, but the capacity is not double and triple based on the reserve life that we see right now, but is more of a one-million increment at the time, but we could go from 6.5 to 9 to 10 relatively easy.

Joe. If you have this, could you post your aeromag survey of the Amapa vicinity in aerial photos to the website?

John, I think MMX probably has a lot of good photography of the Amapa site on their website. You can check that out. I don't know if they actually have an aerial shot or not, but they have a lot of different information available out there.

I'm not sure we would be comfortable, John, at this point in time. We are done... we are not done with the exploration there of really releasing information like that. We think it's pretty sensitive to the area and we’ve still got work going on out there.

Are there competing landholders right on your boundaries?

Absolutely, that is the Guianan Shield up there as you know and there is everything from gold to manganese to ferrochrome to iron ore up there. So it is a pretty hot area of exploration right now.

Thank you.

Thanks.

Thank you. Next question is coming from Jack Franke [ph] of Duquesne Capital.

Thank you. Another question, just real quick on the Australian coal prices, I mean given that the thermal market I think it is at135 over there and we talked about what the met market was. I think you are 50-50 steam and met. I was just surprised that the pricing wasn't higher. I mean did we sign these a couple of months ago or--?

These were signed well over a year ago in the pre-production phase.

Okay.

Of this, Jack, and interestingly enough one of our highest risk factors when we looked at this project was a lack of water washplant and obviously we are now ocean water. So I wish I could for forecast the weather better, but we couldn't so those are the contracts we have in place.

Okay. Are the '09 tonnages open?

Some, but not a lot.

Okay, and what about '10?

Don't know. I can't go...I just don't remember on that one.

Okay. And then just one follow-up on the pricing you guys... if you're going to do the '09 if we can look at '10 and '11 as well on the iron ore in North America. Keeping everything flat. Okay. Thank you.

All right, thank you.

Thanks a lot, Jack.

Thank you. Your next question is coming from Todd Wood of Wood and Company [ph].

Thank you for the excellent disclosure and the clear answer to the questions.

Absolutely, Todd.

If current pricing holds, what levels of return on investments are you expecting for 2008 CapEx?

For our CapEx basis, that’d be very difficult. A lot of our capital is just simply sustaining our North American where the bulk of our... where our capital is spent is primarily sustaining capital. So it would be a very low return on investment and a lot of it is just driven simply by environmental and safety regulations.

And is 10% cost of equity all-in funding cost your.... still your current target for returns on new investments, the acquisitions?

I think it's a good target. To look at… is around the 10% hurdle rate, but they're difficult to obtain.

Yes. I don't know that we've set a specific target because as we all know what we put in for pricing can influence your return rates significantly in that there's a lot of estimate around that. So we look at a factors in terms of how strategic it is and how strong we believe in the pricing in certain cases. 10% is our cost of capital, so that's obviously something that's relevant to the discussion.

Thank you.

Sheryl, we're just about over the hour mark now. So I think it's time for us to wrap the call up. I'll be available for the rest of the day to respond to any additional questions that anyone may have. As always, we look forward to delivering a great performance in 2008 and beyond. And on behalf of everyone here, thanks everyone for their interest. Have a great day.

Thanks, everyone.

Thank you. This concludes today's Cleveland-Cliffs 2007 fourth quarter and full-year conference call. You may now disconnect.