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CLIFFS NATURAL RESOURCES, INC. Reports Operating Results (10-Q)

July 29, 2010 | About:
10qk

10qk

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CLIFFS NATURAL RESOURCES, INC. (CLF) filed Quarterly Report for the period ended 2010-06-30.

Cliffs Natural Resources, Inc. has a market cap of $7.33 billion; its shares were traded at around $54.14 with a P/E ratio of 29.8 and P/S ratio of 3.1. The dividend yield of Cliffs Natural Resources, Inc. stocks is 0.9%. Cliffs Natural Resources, Inc. had an annual average earning growth of 11% over the past 5 years.CLF is in the portfolios of Ken Heebner of CAPITAL GROWTH MANAGEMENT LP, Kenneth Fisher of Fisher Asset Management, LLC, Chuck Royce of Royce& Associates, John Keeley of Keeley Fund Management, Pioneer Investments, Steven Cohen of SAC Capital Advisors.

Highlight of Business Operations:

Our consolidated revenues for the three and six months ended June 30, 2010 increased to $1.2 billion and $1.9 billion, respectively, with net income per diluted share of $1.92 and $2.60, respectively. This compares with revenues of $390.3 million and $855.1 million, respectively, and net income per diluted share of $0.36 and $0.32, respectively, for the comparable periods in 2009. Based on the signs of marked improvement in customer demand, we have increased production at most of our facilities in order to meet increases in demand. In Asia Pacific, the demand for steelmaking raw materials remained strong throughout the first six months of 2010 primarily led by demand from China. During the first half of 2010, the worlds largest iron ore producers began to move away from the annual international benchmark pricing mechanism referenced in certain of our customer supply agreements, resulting in a shift in the industry toward shorter-term pricing arrangements linked to the spot market. We finalized quarterly pricing arrangements with our Asia Pacific Iron Ore customers during the second quarter of 2010, reflecting significant increases over 2009 prices for the first and second quarters of 2010. In North America, we are still in the process of assessing the impact a change to the historical annual pricing mechanism will have on our existing customer supply agreements and in some cases have begun discussing the terms of such agreements with certain of our customers. As a result, we have recorded certain shipments made in the first half of 2010 on a provisional basis until final settlement is reached on 2010 pricing, which is expected to increase significantly over final prices reached in 2009.

Results in the current year reflect continued strong performance at our operations around the world and improved pricing for our products. Our strong cash flow generation and positive outlook for our business are allowing us to resume our focus on investments in our assets which will enable us to continue to pursue strategic objectives and enhance our long-term operating performance, while also providing us with greater confidence and the ability to increase our cash payouts to shareholders. In May 2010, our Board of Directors increased our quarterly common share dividend from $0.0875 to $0.14. We have also continued to strengthen our balance sheet and enhance financial flexibility during one of the most volatile financial periods in history, including a $400 million public debt offering in the first quarter of 2010, the proceeds of which have or will be used for repayment of all or a portion of debt obligations as well as the funding of other strategic transactions and acquisitions.

Sales revenue for the three and six months ended June 30, 2010 increased $794.0 million and $1.1 billion, respectively, over the comparable periods in 2009. The increase in sales revenue was primarily due to higher sales volumes related to our North American business operations. Sales volumes more than doubled at North American Iron Ore during the first six months of 2010 when compared with the same period last year, and sales volume for North American Coal was 76 percent higher than the comparable prior year period. Improving market conditions throughout the first half of 2010 have led to increasing production in the North American steel industry, and in turn higher demand for iron ore and metallurgical coal. Higher sales volume at North American Iron Ore during the six months ended June 30, 2010 was also due to recognition of 2009 carryover tons in the first quarter of 2010 upon shipment and receipt of payment. In addition, higher sales volumes during the quarter and year-to-date periods are attributable to increased sales of Wabush pellets, which were made available through our acquisition to obtain full ownership of the mine in early February 2010.

Cost of goods sold and operating expenses for the three and six months ended June 30, 2010 increased 91 percent and 63 percent, respectively, over the comparable prior year periods. The increase for both the second quarter and first half of 2010 is primarily attributable to higher costs at both our North American and Asia Pacific business operations as a result of higher sales volume, partially offset by lower idle expense at our North American businesses as a result of higher production levels in 2010 to meet increasing customer demand. Costs were also negatively impacted in the first half of 2010 by approximately $69.6 million related to unfavorable foreign exchange rates compared with the first six months of 2009 and $21.7 million of inventory step-up and amortization of purchase price adjustments primarily related to the accounting for the acquisition of the remaining interest in Wabush.

Miscellaneous net of $17.0 million and $14.4 million in the second quarter and first half of 2009, respectively, primarily relates to exchange rate gains on foreign currency transactions related to loans denominated in Australian dollars, as a result of the increase in exchange rates during the prior year from A$0.69 at December 31, 2008 to A$0.81 at June 30, 2009.

The impact of changes in the fair value of our foreign currency contracts on the Statements of Unaudited Condensed Consolidated Operations is due to fluctuations in foreign currency exchange rates during the second quarter and first half of 2010. The unfavorable changes in fair value of our foreign currency contracts of $10.0 million and $7.7 million, respectively, for the three and six months ended June 30, 2010 relates to the Australian to U.S. dollar spot rate of A$0.85 as of June 30, 2010, which decreased from the Australian to U.S. dollar spot rate of A$0.90 as of December 31, 2009. The changes in the spot rates are correlated to the depreciation of the Australian dollar relative to the United States dollar during the reporting period. In addition, we entered into additional foreign exchange contracts during the first half of 2010 resulting in the amount of outstanding contracts in our foreign exchange hedge book increasing from $108.5 million at December 31, 2009 to $249.0 million at June 30, 2010. During the six months ended June 30, 2010, approximately $94.5 million of outstanding contracts matured, resulting in a cumulative net realized gain of $3.5 million since inception of the contracts. The following table represents our foreign currency derivative contract position as of June 30, 2010:

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