Cleveland-Cliffs Inc. (CLF) Q2 2008 Earnings Report, Transcript and Summary

Good morning my name Christie and I will be your conference operator today. At this time I would like to welcome everyone to the Cleveland-Cliffs 2008 Second Quarter and First Half 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. [Operator instructions] At this time, I would like to introduce Steve Baisden, Director, Investor Relations and Corporate Communications. Mr. Baisden?

Thank you, Christie. Before we get started, let me remind you that certain comments made on today’s call will include predicative 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 which could cause results to differ materially. Important factors that could cause actual results to differ materially are set forth in reports, on Form 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 the conclusion of the call it will be archived and available for replay for approximately 30 days on cleveland-cliffs.com. Joining me today are Cliffs’ Chairman, President and Chief Executive Officer, Joseph Carrabba and Executive Vice President and Chief Financial Officer, Laurie Brlas. At this time, I will turn the call over to Joe for his prepared remarks.

Thanks Steve. And thank all of you for joining us on today’s call. We achieved outstanding results during the quarter driven by continued strong market for iron ore and met coal. I want to take a moment to describe some of these dynamics in greater detail. Over the last several years, we have executed a focussed strategy designed to capitalize on an increasing demand for steelmaking raw material in the U.S. and around the world. As you know, the U.S. steel industry has seen a remarkable resurgence in recent years, gained impressive efficiencies and is currently positioned as the global low cost producer. In addition, the continued increase of demand for materials used to fuel the infrastructure, build out of the brick and other countries around the world provides for a significant upside to be realized in the steel cycle over a long-term time horizon. This phenomenon coupled with known supply side constraints has Cliffs well positioned in the current environment. We see no signs of this trend weakening in the near term. Specifically, new supply continues to be limited by logistics generally and in particular the rail and port constraints in Australia. The industry continues to see very long lead times for capital equipment, a lack of available skilled labor and the demographics of an aging workforce. Moreover, these supply concerns are highlighted by the focus of global steel producers on the acquisition of mining assets. We also see a movement to negotiate 2009 met coal contracts earlier than in prior years. This combination of supply constraints and continued strong demand provides an opportunity to achieve greater scale and a stronger position within the market. The nature of the mineral and natural resources processing business is long-term oriented, we firmly believe shareholder value will be optimized by continuing to pursue a long-term strategy. We attribute our strong stock performance, which has achieved a compounded annual growth rate of more than 65% since 2005, to our management team successfully positioning the company through the execution of this strategy, to take advantage of the macro-environment. As many of you know, we have achieved a number of significant milestones during our transition from a North American mine manager to an international natural resources company that we are today. These include expanding globally with our interest in Portman and Amapá and into other minerals such as met coal with Sonoma and PinnOak. Each has been intrinsical [ph] to the growth and success that we have achieved in recent years. Just two weeks ago, we announced a definitive merger agreement with Alpha Natural Resources, which capitalizes on our strong industry outlook and signifies a strategic milestone that will increase our position in met coal, extend our global reach in to the marketplace and dramatic enhance our size and scale. As you know, we have been specific in ensuring our strategic goals with you and this includes our goal to grow globally through acquisitions. We see this combination as a great opportunity from both a strategic and financial perspective, and one that provides compelling value creation for our shareholders. The combination of Cliffs and Alpha will create a major global player and a leading independent supplier of critical raw materials to the North American and global steel industries. With expected annual sales volume of more than 30 million tons of iron ore and 18 million tons of met coal, Cliffs is well positioned to meet growing demand for steel producers in the U.S. and around the world. Furthermore, we believe that Alpha’s strong earnings report this week underscores the value that could be created through this combination. Laurie will talk later on the call about our financial assumptions for the combined company. In a few minutes, I’ll provide additional commentary on other recent strategic and tactical events since our last call. But first, I’ll turn to Laurie for an overview of our second quarter and first half results. Laurie?

Thanks Joe and good morning everyone. In order to open the floor for questions a little sooner, I’ll forego reading all of the numbers that were disclosed in the press release issued last night and keep my comments to our high level performance and thoughts. We’re extremely proud of our results in the quarter. We eclipsed the previous record revenue set last year for the second quarter, with our top line growing 84%. Reported revenues for the second quarter of $1 billion considerably exceeded last year’s $548 million. As you probably remember, at the time of our first quarter call, benchmark prices had not yet settled. Since they settled in the current quarter, we recognized revenue of approximately $70 million in the second quarter, related to the first quarter sale. Even after adjusting for this, Cleveland-Cliffs revenues in the quarter increased to $939 million or up 71% from last year. Net income reached $270 million, an increase of $183 million or 211% from the $87 million reported in the second quarter last year. Adjusting for the Q1 benefit, net income was $232 million or a 167% increased from last year. Cliffs achieved diluted earnings per share of $2.57 up 210%, compared to the $0.83 reported last year and adjusted for the retroactive Q1 sales diluted earning per share with $2.21. The strong revenue and earnings increases for the quarter were driven by this continuing strong market for iron ore and met coal. Turning our focus to the business segment result; it make more sense to discuss the six-month comparisons as these are more reflective of our actual operating results than the Q2 numbers, because of the impact of the price settlement and the related retroactive adjustment that I mentioned. In Northern American Iron Ore, first half sales margin more than double to $337 million. This increase reflects a 42% increase in blast furnace pellet revenue per ton to $94.17, compared with $66.20 per ton in the first half last year. The $94 include approximately $6 per ton in revenue that represent adjustments related to 2007 shipments, where we have contracted to that provide for an adjustment based on some of our pricing factors and where those factors fit, at the time the product is actually consumed in 2008. North American Iron Ore is benefiting from higher steel prices, increased benchmark pricing, as well as renegotiated and new supply agreements for some of our customers. In Asia Pacific, average price realization for lump and fines rose 88% to $98.80 for the half, reflecting the new international benchmark settlements for Australian producers. Also boosting our top line were coal sales from the companies North America met coal operation acquired in the second half last year, and the initial coal sales at our Sonoma coal project in Australia, which commence shipments earlier this year. Turning to the balance sheet at June 30th, we had $320 million in cash and cash equivalents compared with $157 million at December 31. The company had $685 million of borrowings outstanding, including our recently closed $325 million private placement. The balance of the borrowings were under our $800 million credit facility. This compares with $440 million in borrowings outstanding at year-end. In the quarter, cash provided by operations was $203 million bring us to year-to-date total of $83 million. Our cash capital expenditures totaled approximately $59 million in the first half. For the full year, we expect to generate approximately $750 million in cash from operations. This is an increase from our previous estimate of $700 million and is increase of over 150% compared to 2007. Perhaps more illustrative of this effect is that it will generate approximately $500 million in free cash flow in 2008, compared with $89 million in 2007. Continuing our outlook for 2008 by turning to the business segment; in North American iron ore, we expect to realize an average price per tonne of $90, up from our previous estimate of $85 and a 36% increase over last years $66. Because of increasing royalty payment, rising natural gas and diesel fuel cost, as well as deferred maintenance activities that will now be completed at Empire and Tilden, due to our recently announced expansion we’re seeing significant year-over-year pressures on our cost. Our current cost per ton expectation is $57, up slightly from our previous estimate of $56 per tonne, due to the depreciation related to our recent investments, which will result in expanded production. In 2008, North American Iron Ore is expected to have equity production of approximately 24 million tons and sales volume of an estimated 25 million tons, as we sell through some inventory. The increase in equity production and sales volumes is the result of our announced expansion in Michigan and the mid-year acquisition of our minority partner’s interest in United Taconite. In our North American coal segment, average sales realization per ton is still expected to be approximately $94. Cost per ton for the year is expected to be $89, a $3 increase from our previous guidance, due to reduce production outlook. North American Coal is now expected to produce and sell approximately 4 million ton in 2008, a 300,000 ton reduction from our previous guidance. This decrease is the result of extended time for longwall development at Oak Grove, due to the challenges of adding additional equipment and personnel in an increasingly tight market. In Asia Pacific iron ore, we expect to achieve average revenue per ton of approximately $102. This is primarily due to the recent iron ore settlements in Australia of an 80% increase for fine and a 97% increase for lump ore. Our cost per ton in Asia Pacific iron ore is expected to average $58. The cost increase compared to last year, is primarily the result of higher expected royalty payment, related to higher than expected price increases, rising fuel cost and the impact of foreign exchange. Production and sales volumes are both expected to be 8 million ton. At our Sonoma coal project we expect total production of approximately 2 million tons for 2008. Sonoma will benefit from significant year-over-year increases in met coal pricing and will generate average revenue of $142 per ton. This is a $13 increase from our previous guidance of $129 per ton. Costs at Sonoma are projected at $92 per ton, up from our previous estimate of $83 per ton. This is a result of expenses related to mine plan changes and the increasing met coal production. We reported equity losses of $13 million year-to-date from our Amapá investment. As we indicated we expected start-up delays and ramping production levels at the Amapá venture to produce equity losses in 2008. Earlier this week Anglo-American and MMX indicated they expect there transaction to close next week. We look forward to having Anglo as the partner of Amapá and believe their operating expertise will help the project quickly ramp to at $6.5 million ton design level in 2009. Total operating expenses for 2008 are expected to be approximately $140 million. This is made up as an SG&A number of about $180 million, which is offset by casualty recoveries, royalties and gain on -- any gain on sale of assets. We also expect 2008 capital expenditures of approximately $250 million and depreciation and amortization of approximately $190 million. The increase from the previous estimate of $200 million for expected CapEx is related to the expansion we’ve talked about at our Empire and Tilden mine as well as upgrades on the rail line at Portman and acceleration of our Longwall system down-payments that we on order for Pinnacle Mine. Before I turn the call back to Joe I want to reiterate some points from the Alpha merger and our expected financial profile upon completion. First Natural Resources is expected to have a very strong credit profile with anticipated pro forma leverage of approximately 1.2 times debt to EBITDA at December 31st 2008. We’d generate substantial free cash flow in 2009 and 2010, enabling us to do a variety of activities to support increasing shareholder value, including supporting growth initiatives potential share buybacks or increases in dividend, as well as paying down any debt. In 2009 we estimate the combined company to have consolidated revenues of approximately $10 billion and EBITDA of approximately $4.7 billion with Cleveland-Cliffs operations contributing $2.5 to $2.9 billion in EBITDA towards to total. Annual synergies of approximately $200 million are expected from 2010 forward primarily due to our ability to enhance processing and blending efficiencies and opportunities at our coal facilities. In short we will have an extremely strong financial position and enhanced size and scale that will position us to continue our legacy of building shareholder value. With that, I will turn the call back over to Joe.

Thanks Laurie. Our results today clearly demonstrate the value of our strategic actions over recent years. Many of the actions our management team is taken are now providing tangible benefits to Cleveland-Cliffs shareholders in terms of enhanced financial results. We continue to build on those decisions with new projects that will provide immediate as well as long-term benefits. In addition to pursuing external strategic growth projects our business team is also focused on internal growth opportunities that add value with minimal risk. In our North American Iron Ore segment we’ve reported very strong results, for the quarter and expect to increase our equity production by 10%, and our sales tons by 12% for the year, by focusing on organic growth opportunities. Recently, we announced a $290 million capacity expansion project for Empire and Tilden mines, designed to increase North American Iron Ore sales volume by an aggregate 43 million tons through 2018. In addition, we consolidated our minorities 30% interest in the United Taconite mines giving us 100% ownership of that facility, further increasing our North American equity production and future sales volume. And importantly those two projects carry no risks, integration risks whatsoever. In North American Coal, we continue to face operational challenges that we believe the Alpha management team can help quickly correct. We are making progress on evaluating short and long-term mine plans, making capital improvement and enhance organic prep plant efficiencies. On the commercial side, we’ve also recently signed a contract with to deliver met coal from Pinnacle in the mid 200s price range per ton at the mine. In the Asia-Pacific Iron Ore segment, the team at Portman continues deliver exceptional results. Although Cockatoo Island is expected to close in the third quarter, we continue to evaluate opportunities to extend its life. Upgrades to the rail will take place throughout the balance of the year to secure the consistency of the production from Koolyanobbing. Portman has recently taken 19.9% position in Golden West and its Wiluna West Iron Ore project. We are very please that our ownership position in Portman Limited increased from 80% to 85%, as Portman closed its previously announced share buyback program. Portman has contributed exceptionally well to both our long-term strategy and financial results since we acquired our position back in 2005. In short, Cliffs continues to explore avenues to creating value and with that we will be happy to open the call for questions.

Christie, we are ready to take questions at this time. Question and Answer

[Operator Instructions] Your first question comes from the line of Jorge Beristain of Deutsche Bank.

Hey. Good Morning.

Good Morning.

Good Morning Jorge.

Steven, Joe and everybody, great results Laurie. I just, one of the things that’s been a little difficult to keep on top of with Cliffs, due to your rapidly evolving nature has been your guidance. And we have noticed that your realization guidance for North America again moved up, from pre-quarter I believe, it was $85 a metric ton, now you are talking $90 a metric ton, yet your guidance for HRC only moved up $25 a ton, which would imply only, something like $0.65, $0.70 of that $5 change, can you account for the difference? Is that mainly due to the recent contract renegotiations with certain clients or are there other escalators that are kicking in there, to drive up your guidance so much, quarter-on-quarter?

Well, Jorge, the hot rolled does have a pretty significant impact, because remember that we do have some things that are retroactive and things are consumed that has an adjustment on it. Also the PPI’s have moved up somewhat as well.

Order of magnitude of that $5 increase, could you kind of quantify what percentage would be the HRC driven, what percentage cost escalators and what percentage retroactive?

I think that will be pretty difficult to do on the call Jorge, just split that out and be accurate in that. I think Steve Baisden our IR guys would be happy to follow-up with you on that.

But we can say it if we got the detail that makes that clear.

Okay and my second question was just related to the cooperation’s where I guess in North America we still continue to see negative EBIT to contribution I guess. Are you confident that by the second half we will start to see a turnaround in the EBITDA contribution from PinnOak?

I believe we will, I mean you seen we had a tough first half start, we had some more geological conditions in Pinnacle, that we worked through. Again, as we said in the first quarter I think, a remarkable part of that was the Cliffs team along with the Pinnacle team down there went from a dead stop a year ago, to working through that and force majeure a few 100,0000 tones. So that was great progress on the part of the team. We are starting to get some point [ph] fines from the recovery system that are starting to come through in the second half and the organic efficiencies, we’re making some small capital changes particularly down at Oak Grove and we’re starting to see efficiency gains in Oak Grove. We still do face through 2008 longwall moves. The challenges for us is just simply to get the development far and up ahead. Strictly a mining engineering system, its not a mystery and as we lay our plans out we are going to have to work through the latter half in Oak Grove particularly with the mine moves to try and get those workers straight and cut the time down on longwall moves. But I’m much more confident of a better second half.

Thank you.

Your next question comes from the line of David MacGregor of LONGBOW Research.

Good morning David

Good morning everyone. Great quarter.

Thank you.

Joe in your prepared remarks you mentioned that, you sold some met coal forward for ‘09 in the mid 200. I wonder if you could may be provide a little more detail how much met coal and whereabouts in the mid 200?

Well I guess David I could but I prefer not to. We are in the middle of negotiations and the reason is not share the advice, but we are in the middle of negotiations with a lot of different brokers and buyers at this point in time. We do see the buyers moving forward in their purchases from where it’s from. And this was a small contract that we let out first as we layer in the ‘09 pricing. It is from the Pinnacle mine and it’s a domestic mine. The mid 200 is FOB the mine and it is a standard ton on that for the factors. But pricing is beginning to start. The pricing season I’d say is very early and we just want to make sure we get the full market price for our coal this year.

Okay, may be just; talk a little bit about the market conditions around that met coal. I presume it’s a backwardation market. How much of the discount you have to take on selling, how far forward? Can you give us some sense to what that price structure looks like?

We don’t see any discount whatsoever in selling forward at this point in time. I think it’s just a matter as the market heats up, and we look at global conditions around the world on the supply constraint, which we think will continue to tighten. It’s a matter of how much more out of the pricing we can get this year. So we’re not real anxious to settle contracts early as we were last year, as we just got into the coal business and we are just learning to understand the market dynamics. So, we are going to take our time later in the coal business this year.

Okay good. Can you talk about the potential for further capacity expansion? North America, you talked about Empire and Tilden. Is there opportunity to conduct a similar type of expansion Northshore and UTAC or you sort of impeded by the fact that you don’t own the underlying property?

The underlying property is not a problem whatsoever. The biggest hurdles that we face are environmental permitting, as it is with any mine in any location within the U.S. David, recently we did announce we are going forward on the permitting for an expansion at UTAC for about – I think that’s about 500,000 to 700,000 tons. I mean that the kind of why you’ll see is incremental, why it’s coming in our organic growth but they are beginning to add up into a few million tons as well. So we are just getting the permitting ready to submit for another small expansion at UTAC.

Okay. And then the last question the Mesabi Nuggets maybe we could just get up-to-date on the economics of that if the plant were up and running today. Where you would be able to sell that today and what would be cost of production today?

Well the discussions that we have with potential customers are really overwhelming as far as a merchant plant coming on. As you know a pig iron right now is somewhere in the neighborhood of $800. I think that’s priced FOB New Orleans. That’s the area of pricing that we would be looking at. We would benchmark against pig iron, as it comes in. The pricing on the plant will certainly move up and as it escalates the engineers are really working forward to final design and not feasibility, but final design and tie those numbers down. But I’d say we’re are going to be 250 to 275 and that’s $250 million to $275 million in the capital of this plant is that it moves forward and I would suspect operating cost will also move up with natural gas coming in much higher into the –- probably $300, 275 to 300 would be the upper end to the range, but you can still see that’s a pretty robust profit margin for this project

Right so 275 to 300 would be your cost of production.

Yes.

Okay. Great, thanks very much Joe.

Okay thanks David.

Thanks.

Your next question comes from the line of Mark Parr of KeyBanc Capital Market.

Hey good morning.

Hi Mark.

Hey I’ll just echo and say great quarter.

Thank you.

I’m more interested though in the ‘09 EBITDA outlook that you provided. I think, is this the first time the $2.5 billion to $2.9 billion range, is it the first time you publicly disclosed that number.

Yes it is.

Okay and that’s what I thought and so I’m a little new to the story, so I apologize if I had missed something. The – I was wondering Joe what sort of additional color you might be able to provide on the components of that growth forecast.

Well, starting from the volume side next year Mark, we will pick up additional tons. We’ll get the full year benefit of the Northshore expansion this year. That will be about another 200,000 tons that come on. We will get the 30% minority ownership, we’ll see a full year of that at UTC, which will impact both the volume, and well everything all the way through. And the recent 5% pick up on the share buyback at Portman will also impact things as well. So, just organically you’re going to get those to come through with no risk, as it comes forward. Obviously iron ore pricing we are pretty bullish on where that’s going to come out. I don’t have a number for you yet, but in the ‘09 guidance as we did state if nothing changes in ‘09 we are looking at a 26% price increase that’s already locked in if you will and obviously we –

Would that 26% represent the midpoint of that EBITDA guidance range?

No, that’s already locked and loaded, that would be more in the low end.

Okay.

Yeah. I think everything can go up from there, and obviously, we certainly the PennOak mines will have a full year and a half of ownership with the lot of investment in those mines. As you can see, we are working our way through the problems, one by one getting those systems ready to go and enjoy full pricing in the coal business and full volumes for ‘09. I’m sure the guys are going to do a much better job both in volume and pricing going through. So that’s just some of the highlights to get you started with on it, but they are mechanical features, there is not another lot of stretching in the imagination on that.

Okay, terrific. If I could ask another question, I know you had commented in your release on the fact that you have been making. I mean, talking with the lots of shareholders about how far it continues to be somewhat of a controversial situation. But, based on the way that the stock have been acting recently, both your stock and ANR, there seems to be some clear evidence that there is support for you guys to do this. Just, if you could just provide some general color on what are the put and takes? What are shareholders telling you they like about this? And I’m just curious, the kind of feedback you’re getting?

Well, you know Mark, so you knew the story but you know as well and most of our investors and shareholders do with that. I think they’re happy to see us executing on a strategy that we’ve been counting for the last 18 months. We’ve stayed within that strategy for our growth and certainly within the Alpha side, we’ve been talking a long time about consolidating Central Appalachian Coal and this is a move that we’ve talked about since PennOak. So, I think people are -- as always are -- it’s easy to talk a strategy, but they’re glad to see us on a strategy. I mean, sometimes it might be surprising the large step that we took. But when people step back following Alpha’s earnings earlier this week in the ‘09 guidance, you’d see the strength of the iron ore business. People get this story pretty quickly and the $4.7 billion EBITDA number can get filled in rather quickly and I think most people can still see there is upside to the pricing, which would extend the cycle. So, I think it’s been a bullish response; we are letting the numbers in the data, do the talking for us. Certainly, all of the analyst communities can put these numbers together and come to their own conclusions. It’s all about value for everybody and for every shareholder and we still continue to believe in that and we think our shareholders do as well.

Okay. I really appreciate that color and just one last question. I think you would have some discussion with MacGregor earlier. I mean he had indicated he thought that met coal market might be in backwardation. I am assuming by that he might-- he thought that 2010 pricing outlook from met coal to be lower than the ‘09 outlook. I’m just wondering if you are having any response from customers that would, be willing… are you thinking about extending contract pricing into 2010? Or what… I guess may be another way of asking that question is what would it take to get you to extend contract pricing into 2010 at this point?

Well, it would have to be something north of 300 to get to 2010 at this point of time Mark.

So, is it fair to say that you and MacGregor had a disagreement about the state of the global met coal market?

I am not sure, I don’t want to speak for David, he may come back on and comment from start, but my point…

I wish he would.

My impression is that David is pretty bullish on the met coal market and it may have been an event of the time factor but the longer you go out that continuing increases might not be something that a customer would be interested in.

I guess Mark just to add to that, again we are not at this point in time from where we see the met coal cycle and the supply constraints. We are not going to give up pricing for ‘10 for security of supply. We are strong enough on that as we look out into ‘10.

I just thought it was interesting that on the Metal [ph] call yesterday day and yesterday or day before yesterday Metal had indicated that China was now a net importer of met coal. And that’s quite change from where they have been over the last several years.

Well, they have been for about 18 months now and I think also you can’t rule out the on the long-term the South African power supply constraint which in recent weeks, the mining industry there is already taken a 10% decrease in power and it looks like they are expecting another one as well. So there are lot factors going into this but each one are not event driven like the floods of Australia but more of long cyclical nature supply constraints.

Okay, well, I really appreciate all the incremental color Joe and Laurie congratulations on the great results and look forward to the next call.

Thanks Mark.

Thanks Mark.

Your next question comes from the line of Meredith Bandy of BMO Capital Markets.

Hi guys, again great quarter obviously. Good morning.

Thank you, good morning.

I guess when I go back a little bit to the steel prices and how they are affecting your iron ore pricing. Can we still use that sensitivity of the $10 change and the $0.24 unrealized?

Yeah, you can still use that.

So if taken in at an extreme, if I prove into that, the spot prices of hot rolled, which is obviously quite a bit higher than your guidance, would I run into any problem with cap or does that sensitivity take into account any this sort of cap and that sort of thing? Does that make sense?

Yeah, I don’t think you are going to run into anything with a cap on that. It’s more related to the international benchmark price that we get into caps.

Okay, all right.

It went up for 2008.

Okay, all right. That’s helpful. Thank you. And then sort of a tricky type question. It looks like you still have about half of the Q1’08 adjustments to come through. Is that right and if so, do you know what the timing of it, is it going to be next quarter and then you are done or…

We should have seen all the adjustments in this quarter, Bandy.

Okay, I thought that you had guided to like, $0.75 last quarter and now we only saw $0.36 phase though.

Pre-split. That was before we split.

I am sorry.

Yeah.

It’s okay. Thank you so much. I appreciate it.

That’s okay.

Take care.

Thank you.

Your next question comes from the line of Mark Liinamaa of Morgan Stanley .

Good Morning.

Good morning.

Regarding Amapá there was some discussion about rail-rights and things like that, going through the court systems, is there any update on that at all?

Yeah, there is, Mark. We have spoken with Anglo. They have completed their due diligence to get their deals finished with MMX and it was around the rail concessions of Amapá. They are satisfied, and believe me they have spent a lot of time and effort to get this deal finished. That the rail concessions are fine, are in good shape, and I think their recent announcement is they are going for the full close, based on their results of their investigation August, the 5th. So, that seems to be getting behind us.

That’s great. And just on the iron ore markets, you mentioned that you were bullish, there has been a lot of discussion from various parties for this being one of the growth expectations in the fairly near-term. Can you give us any sense of how you see supply demand balances unfolding over the next little bit?

Well, we still see it very, very tight; we still see the supply side and deficit project work that everybody is talking about. It continues to be pushed out for, by three months by six months, at a time and again the supply deficit cycle continues to be pushed out Mark. We don’t see anybody get anything to the market in advance.

And with the coking coal as tight as it is, are you seeing any change in the steel industries desire for pellets to help us at some of the efficiencies?

Yeah, we certainly have. I mean, there is a huge desire at these prices for hot band to push every ounce. You can out of those blast furnaces and certainly the pellets along with the premium coking coal gives them, that the chance to get their efficiencies out as much as I can. And yeah, there is a big desire for more pellets…

So do you think pellets can outperform lump and fine in the negotiations next year?

While that just too early to call. I guess any thing is possible, but I don’t think these guys have gotten of their break from the last negotiations yet. I think it’s just too early to call.

Okay, great and good luck with everything.

Thank you.

Thanks.

Your next question comes from the line of John Healy [ph] of Forest Investment.

Good morning John Healy, Forest Investment. Great quarter.

Thank you

Thank you.

With regard to the purposed take over of the ANR, since you announced this deal your stock price is unchanged. And given the very, very strong earnings you just reported, it would seem to me like the market is telling you it doesn’t like this deal. And also this --your larger shareholder who opposes this deal. I did some research, is that a pretty accomplished investor. My question is why would you continue to pursue the deal if the market and the largest shareholder telling you it doesn’t make sense and is not in the best interest of shareholders.

We are in the second week of this deal been announced. So it’s pretty early days John, if you will, we wanted to get the investment community up to speed if you will with recent results. So I think some of the data that the first remarks were made on were pretty stale, and was pretty old data. I think certainly with the results of this week and the ‘09 guidance, people can go now go back now and dust off their models and redo this. And its still has incredible shareholder value for both sides. And we have no thoughts of anything but pursuing this.

Okay. In terms of… you mentioned $200 million a year in synergies, if you look at the premium you are paying for ANR, it’s over its like $2.3 billion. I mean is there of siphon of synergies, is there any sort of incremental EBITDA that would be… but then it would be sort of long payback period based on $200 million of synergies. Is there incremental EBITDA that would shorten that payback period in terms of this combined company?

John, when we did the valuation work, we would spend a lot of time in valuing both companies and we felt that given the value that we ascribe to their stock that this, was an appropriate way to think about it and that the pay back will be appropriate and will be there.

Okay. Thank you.

Thanks.

Your next question comes from the line of Alex Michelle of Scopus.

Alex, are you there?

Hello.

Hi, Alex.

Hi, good morning. I don’t want take away from the earnings as they were fabulous, but just the other way around can you just talk about the strategic value of the company with, lets say without ANR, considering that you have such a large buyer in North America of your product?

Well the strategic value continues to be enhanced by the execution of our strategy, Alex. We’ve done anything but sat still in the last few years since we’ve embarked on this new strategy that we’ve explained and have been very transparent on. So we see the value of this company continuing on with the Alpha…

I was just asking if you were not to pursue the ANR?

Well, we are…

What would be the strategic value of the company when… I meant how is... you are such a large customer?

I can’t answer that because we are not going to pursue the ANR acquisition.

Okay. All right.

Thank you.

Your next question comes from the line of Tom Molnar [ph]of Sandler Capital.

Hey guys congratulations. Just quick question on the North American coal given the reduced production is there any risk of needing to sell any ‘09 production in the 90s levels or it sort of make up the production at lower cost or does that just gets washed off at the end of the year?

Little bit of everything. There will be a minor portion that we’ll flip over into ‘09 but it’s a very minor tonnage at this point in time, but most of the coal will be at ‘09 prices.

Fair enough. Thanks a lot.

Thank you.

Your next question is a follow up from the line of David MacGregor of LONGBOW Research.

I guess I’m just focus on the cost of getting iron out of the North American market into the global market and I guess in all the years I covered you, it’s always just been understood that’s an inland market is landlocked, the pellet is coming off in Mesabi your Northern Michigan had to stay in the Great Lake pace and what is the cost right now, just so we are understanding of loading of vessel at Escanaba and getting it out of retirement in the year and getting out to a deep water port of East coast?

We think if you take that east coast David or

Yeah as opposed to railing it out to the west coast, I’m not sure.

So, I don’t know that I have those numbers to the east coast.

I know U.S. Steel did have it with a couple of cargos last year but primarily to the east coast.

If you would what we normally look at is moving – if we were to move product from – the loading point over in to some European ports with rail and…

That works to that number

Your looking around probably somewhere around a $100 at this point in time to put product in to Europe just on the shipping and again we put some rail in there because there is very few places that you would just unload from a port and go right in to it .So there is a lot of… $100 a ton would not be that far off I think, that’s when you know, which point in Europe.

Joe just for comparison sake what’s it costing you to send a Wabush pellet to Europe.

I don’t have that number of the top of my head David. I am sorry

It would be the difference between those two numbers would, wouldn’t that…

Well, I mean we sell FOB Wabush and most of our shipments are FOB we don’t deal with a lot of ocean freight when it comes to we have those numbers but I just don’t have them here today.

David I can follow up with you with what we think it would cost in terms of freight to get it on to a deep size vessel over to Europe.

I guess where I’m going is I’m just trying to get a sense of how close are we given the kind of price movement we’re for getting an iron ore these days unlikely to get in 2009 maybe even ‘10

Yeah I think the equation David that we’re seeing when we get request fork and I again I go to Europe for particularly from Europe or any place else is scarcity not anybody looking at crossover curves on pricing from other areas and basins starting to move product. Its simply people can get the product again it is just the bullishness of the cycle that we continue to see and if you will they’ll pay any price, including their freight and shipment, just to keep their mills running, but it’s more scarcity than it is actually doing an analysis on where the product should come from.

All right. But, if you give more pellets out of UTAC or out of Northshore, and you can sell those into the seaborne market, because the economics are laid to cover the freight if getting it out of the Great Lakes. I mean, that’s the analysis. I guess, I’m interested in understanding?

Once we satisfy our customer requirements for our contracts, so we will sell. If we have spot tonnage, we will sell it where we need to, to get the most value out of that product.

Yeah, we’re adverse if the customer wants product in Europe and we have it available for the right pricing. We’re not averse to shipping anywhere.

So if you had the pellets today, I guess to make a long story short. If you had the pellet today, and you had the customer in Europe today, could you make money exporting all to the Great Lake basin?

Well, we could because we would sell FOB to port, the freight would be…

On the customers account.

Yeah, it would be on the customers account. We don’t take any freight exposure in this market.

Okay. Thanks very much.

Okay.

Your next question is a follow-up from the line of Jorge Beristain of Deutsche Bank.

Hi. Just may be following up on quickly two questions. One is, I know you don’t sell well anything really right now North America to Asia, but really Asia is the price setter for your commodity. And I was wondering if, what your view was currently on the fact that such high international freight rates, particularly from Brazil to China. 85, 90 bucks a ton, current contract for fine is about $80? So you are kind of looking at a delivered cost into Asia of 170, which is very close to sort of the spot prices that the Chinese iron ore produces are charging right now. What’s your view on the market right now, do you believe that there is an anomaly in international freight rates that will unwind into the second half, because sort of the, I guess the competing natural substitute coming out of China does not seem to be pricing north of 200, which would be kind of what you need to have a big spread for another jump up in international prices?

Right, I don’t see it in the second half, I mean again when you get into things, such as constraints, such as ships, those can be overcome. And again when you read the shipping schedules of what’s being built, certainly the supply on that can be overcome. But I think again we are a few years out. And I would think those tons are going to continue to be expensive because those new ships are using very expensive steel to go in them. So what they are going to have to recover on an incremental basis is going to continue to have to stay very, very high versus the current fleet that was built at very low prices. So it could direct itself, but its a few years and they are going to be very expensive ships that are going to come on in the market.

But, I guess, in a nutshell, are you not concerned right now with where the spot price of Chinese iron ore is relative to Brazilian delivered?

No, that doesn’t really bother us when we look at the markets we are selling into.

Okay. And my other question was just related to the Teck Cominco Fording proposed acquisition. Would this in your view change the nature of the consolidation of the North American met coal market? I understand already that they basically control that operation. But in your view, are we just starting to see sort of the tip of the iceberg of consolidation?

Well, we said, all in all, I don’t think Teck Cominco that, yeah, this is the one of the few mining districts in the world that is left, that hasn’t been consolidated and I think as the world goes forward and the scarcity of the minerals, particularly minerals that you can use domestically and export with this weak U.S. dollar, I think it’s yes, it certainly the beginning.

Okay, thanks.

Okay.

Your next question comes from the line of Wayne Atwell of Pontis Capital Management.

Hi.

Good morning, Wayne.

Good morning.

Have you thought about changing the pricing dynamic of iron ore pricing in North America. The steel industry has consolidated a great deal over the last number of years. This is probably most profitable the business it been in, in 40 or 50 years. Traditionally, you had a pricing relationship which kept the price frequently below the market globally and sort of protected you from wide swings. But you are a much more global and much more healthy and a strong company now. So you sort of leaving some money on the table vis-à-vis pricing at global price rather on spot basis or what the market would price you at globally. I realized you have long-term contracts in a number of cases. But have you thought about changes in dynamic and going more towards the global price or spot price?

Sure, we think about. Wayne, again we are always trying to maximize the profit of the company and as contracts become due, if the world looks the same as it does today, we will put lot of thought into that process. We are married into any particular habit that we have right now these contracts have served us very well. They have served our customers very well. But I think your point is well made and we accept it. But as time change and as the contracts roll off, given at that time and what the road looks like, we will make the appropriate judgments.

And what’s your flexibility? How quickly… you say you decided this afternoon you wanted to this. How quickly would you be able to… what’s the maturity of your contracts which would permit you to modify your pricing model?

The time links are in the K, Wayne, they are well spelled out but our next significant contract changes out there 2015 Wayne. So we’ve got a ways to go.

So instead of academic, it is beyond the investment horizon of just about everybody I know. So you are talking about that to be seven years?

That’s right. Yes.

And it wouldn’t be an early reopener that, I guess there wouldn’t be on the stay on to see the best interest to cave in and permit you to charge a higher price. So they are going to stick to those contracts.

We have, if you read over the last, in the last few months we actually had one reopener. We certainly do up the steel industry because of the shortage. They are interested in working with us in ways that we can generate more tonnage to provide them and certainly if they want to reopen for more tonnage, we are looking to offset that with opportunity. So we have enough of some opportunities like that to move things up. But because of that geographic constraints that we have just talked about this is kind of relationship that both parties need to have some long-term beliefs in.

Right. But you don’t have a whole lot of flexibility on the upside in the U.S. You can add some capacity here and there, but you can’t add 50% or so to production?

No.

No. we can’t.

All right. Okay. Thank you.

Thanks.

Your next question comes from the line of Mark Liinamaa of Morgan Stanley.

Is there any update you can provide on Wabush what’s going on in Labrador and may be any commentary on any opportunities you might see in that part of North American Iron Ore supply?

The other partners that are working away on Wabush. We are up there with a lot of business improvement energy and ideas, you know we are the managing partner of the three. Our VP of Ops is spending a lot of time up there to maximize the value out of Wabush as we come more smart. As you know there is a lot of projects that are out there in Eastern Canada, we are really focused on other parts of the world. So we are happy with Wabush it’s a providing a good source of income right now, and as you know it gives us export potential, but we are really focusing, Cleveland-Cliffs, is focusing on other parts of the world.

And are there the litigation issues at all, what’s the status?

Motions have been filed and heard on U.S. steel perhaps, Cliffs filed a subsequent motion and we are waiting to hear from the judge.

Thank you.

Christie, with that we’re approaching the top of the hour. So, we are going go ahead and finish up the call. I want to thank everyone for joining us today. We will be around for the rest of the day there to follow-up on any questions that you might have. And thanks for listening to the call.

Thanks everyone.

Thanks.

This does conclude today’s conference call. You may now disconnect.