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

October 29, 2010 | About:
10qk

10qk

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CLIFFS NATURAL RESOURCES, INC. (CLF) filed Quarterly Report for the period ended 2010-09-30.

Cliffs Natural Resources, Inc. has a market cap of $8.48 billion; its shares were traded at around $63.37 with a P/E ratio of 16.4 and P/S ratio of 3.7. 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 Kenneth Fisher of Fisher Asset Management, LLC, Chuck Royce of Royce& Associates, Steven Cohen of SAC Capital Advisors, Jeremy Grantham of GMO LLC, Pioneer Investments.

Highlight of Business Operations:

Our consolidated revenues for the three and nine months ended September 30, 2010 increased to $1.3 billion and $3.3 billion, respectively, with net income per diluted share of $2.18 and $4.60, respectively. This compares with revenues of $666.4 million and $1.5 billion, respectively, and net income per diluted share of $0.45 and $0.78, 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 nine months of 2010 primarily led by demand from China. Higher sales volumes in North America during the quarter and year-to-date periods are also attributable to increased sales of iron ore pellets, as well as metallurgical and thermal coal made available through our acquisitions of Wabush and CLCC during the first and third quarters of 2010. Earlier this year, 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 and reached final pricing settlement with the majority of our North American customers through the third quarter of 2010, reflecting significant increases over 2009 prices for the first nine months of 2010. However, we are still in the process of assessing the impact a change to the historical annual pricing mechanism will have on certain of our larger existing North American Iron Ore customer supply agreements, and negotiations are still ongoing with these customers. As a result, we have recorded certain shipments made during the first nine months 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 per share. We have also continued to strengthen our balance sheet and enhance financial flexibility, including the completion of two public debt offerings for $400 million and $1 billion in the first and third quarters of 2010, respectively, the net proceeds of which have been used for repayment of a portion of our debt obligations and have been or may be used for the funding of other strategic transactions and acquisitions.

Selling, general and administrative expenses in the third quarter and first nine months of 2010 increased $39.7 million and $80.7 million, respectively, over the same periods in 2009. The increase is partially due to higher variable compensation costs in each period of $11.3 million and $21.5 million, respectively, as well as additional expense of $3.7 million and $18.3 million for the quarter and year to date, respectively, related to a performance royalty for our investment in Sonoma. We also incurred $2.5 million and $8.9 million in the third quarter and first nine months of 2010, respectively, related to our involvement in exploration activities, as our global exploration group focuses on identifying new world-class projects for future development or projects that add significant value to existing operations. In addition, we incurred costs of $7.1 million and $9.4 million in the third quarter and first nine months of 2010, respectively, primarily related to feasibility study costs of $1.2 million, drilling costs of $1.5 million, and other project expenses of $2.4 million associated with our recently acquired Ferroalloys operating segment.

Miscellaneous net losses of $22 million and $22.1 million in the third quarter and first nine months of 2010, respectively, primarily relate to foreign exchange losses on our Australian bank accounts that are denominated in United States dollars, as a result of the increase in exchange rates during the current year from A$0.90 at December 31, 2009 to A$0.97 at September 30, 2010. In each of the comparable prior year periods, we had gains of $4.9 million and $19.3 million, respectively, primarily related 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$0.88 at September 30, 2009.

As a result of acquiring the remaining ownership interests in Freewest and Wabush during the first quarter of 2010, our year-to-date results were impacted by realized gains of $26.3 million primarily related to the increase in fair value of our previous ownership interest in each investment held prior to the business acquisition. The fair value of our previous 12.4 percent interest in Freewest was $27.4 million on January 27, 2010, the date of acquisition, resulting in a gain of $13.6 million being recognized in the first nine months of 2010. The fair value of our previous 26.8 percent equity interest in Wabush was $25.7 million on February 1, 2010, resulting in a gain of $12.7 million also being recognized in the first nine months of 2010. During the third quarter of 2010, the fair value of our previous equity interest in Wabush was further refined from the initial estimate completed in the first quarter of 2010 and we continued to ensure that our previous equity interest in Wabush was incorporating all of the book basis. These adjustments resulted in a reduction to the gain of $34.3 million, which was recognized retrospectively as of the acquisition date and reflected in Other income (expense) for the nine months ended September 30, 2010. Refer to NOTE 7 ACQUISITIONS AND OTHER INVESTMENTS for further information.

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 third quarter and first nine months of 2010. The favorable changes in fair value of our foreign currency contracts of $32.5 million and $24.8 million, respectively, for the three and nine months ended September 30, 2010 relates to the Australian to U.S. dollar spot rate of A$0.97 as of September 30, 2010, which increased 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 appreciation 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 nine months 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 $305 million at September 30, 2010. During the nine months ended September 30, 2010, approximately $153.5 million of outstanding contracts matured, resulting in a cumulative net realized gain of $10.5 million since inception of the contracts. The following table represents our foreign currency derivative contract position as of September 30, 2010:

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