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

July 28, 2011 | About:
10qk

10qk

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CLIFFS NATURAL RESOURCES, INC. (CLF) filed Quarterly Report for the period ended 2011-06-30.

Cliffs Natural Resources Inc has a market cap of $13.54 billion; its shares were traded at around $93.59 with a P/E ratio of 9.3 and P/S ratio of 2.8. The dividend yield of Cliffs Natural Resources Inc stocks is 0.6%. Cliffs Natural Resources Inc had an annual average earning growth of 6.8% over the past 5 years.

Highlight of Business Operations:

Our consolidated revenues for the three and six months ended June 30, 2011 increased to $1.8 billion and $3.0 billion, respectively, with net income per diluted share of $2.92 and $6.02, respectively. This compares with revenues of $1.2 billion and $1.9 billion, respectively, and net income per diluted share of $1.92 and $2.49, respectively, for the comparable periods in 2010. Based upon the recent shift in the industry toward shorter-term pricing arrangements linked to the spot market and away from the annual international benchmark pricing mechanism historically referenced in our customer supply agreements, pricing has continued to increase through the first half of 2011 from the comparable period in 2010. We have finalized short-term pricing arrangements with our Asia Pacific Iron Ore customers. This change in pricing has impacted certain of our U.S. Iron Ore customers supply agreements for the 2011 contract year, and in some cases we have revised the terms of such agreements to incorporate changes to historical pricing mechanisms. In addition, in April 2011 we reached a negotiated settlement with ArcelorMittal with respect to our previously disclosed arbitrations and litigation resulting in additional revenue recorded in the first half of 2011. Revenues during the first half of 2011 were also impacted by higher iron ore sales volumes in Eastern Canada and higher metallurgical and thermal coal sales volumes in the U.S. that were made available through our acquisition of Consolidated Thompson and CLCC during the second quarter of 2011 and the third quarter of 2010, respectively. In Asia Pacific, the demand for steelmaking raw materials remained strong throughout the first six months of 2011 primarily led by demand from China.

We also continued to align our balance sheet and enhance our financial flexibility to be consistent with our long-term financial growth goals and objectives, including the completion of a public offering of senior notes in the aggregate principal amount of $1 billion and a $1.25 billion five-year term loan. The senior notes offering consisted of a $700 million 10-year tranche and a $300 million 30-year tranche completed in March and April 2011, respectively. The net proceeds from the senior notes offering and the term loan have been used to fund a portion of the purchase price for the acquisition of Consolidated Thompson and to pay the related fees and expenses. We completed a public offering of 10.35 million of our common shares in June 2011. A portion of the net proceeds were used to repay the $750 million of borrowings under the bridge credit facility, with the remainder of the net proceeds to be used for general corporate purposes.

Cost of goods sold and operating expenses for the three and six months ended June 30, 2011 increased $305.4 million and $312.2 million, respectively, over the comparable prior year periods. The increase was primarily attributable to higher sales volumes at our Eastern Canadian Iron Ore and North American Coal business operations, resulting in higher costs. Cost of goods sold and operating expenses for the second quarter and first half of 2011 also included the impact of expensing an additional $48.4 million of stepped-up value of inventory that resulted from the purchase accounting for the acquisition of Consolidated Thompson. In addition, costs were negatively impacted in the first half of 2011 by approximately $46.8 million related to unfavorable foreign exchange rates compared with the first half of 2010. These increases in cost were partially offset by lower costs at our U.S. Iron Ore business operations as a result of lower sales volume and cost reductions resulting from the ArcelorMittal price re-opener settlement. The cost reductions represent the cost reimbursements that we realize under cost sharing arrangements with ArcelorMittal. In addition, $10.7 million of inventory step-up related to the accounting for the acquisition of the remaining interest in Wabush was recognized in the first quarter of 2010.

The increase in exploration costs of $10.5 million and $19.5 million for the three and six months ended June 30, 2011 over the same periods in 2010 was primarily due to pre-feasibility study costs of $3.4 million and $6.0 million, respectively, and environmental and engineering costs of $5.0 million and $6.8 million, respectively, related to our Ferroalloys operating segment. In addition, we incurred an additional $1.8 million and $5.0 million, respectively, in the first three and six months of 2011 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 are intended to add significant value to existing operations.

In addition, favorable changes in the fair value of our Australian dollar foreign currency contracts resulted in net realized gains of $16.9 million and $27.8 million, respectively, for the three and six months ended June 30, 2011, based upon the maturity of $65 million and $125 million, respectively, of outstanding contracts during each period. Of these gains, $14.9 million and $24.0 million, respectively, were recognized in previous periods as mark to market adjustments as part of the changes in fair value of these instruments. Further, we recognized mark to market adjustments of $5.0 million and $7.6 million, respectively, for the three and six months ended June 30, 2011, for those contracts still outstanding as of June 30, 2011. The following table represents our Australian dollar foreign currency exchange contract position for contracts held as economic hedges as of June 30, 2011:

The increase in interest expense in the second quarter and first half of 2011 compared with the same periods in 2010 is attributable to the completion of a $1 billion public offering of senior notes that was completed in the third quarter of 2010 consisting of two tranches; a $500 million 10-year tranche at a 4.80 percent fixed interest rate and a $500 million 30-year tranche at a 6.25 percent fixed interest rate. We completed an additional $1 billion public offering of senior notes during the first half of 2011 consisting of two tranches; a $700 million 10-year tranche at a 4.875 percent fixed interest rate and a $300 million 30-year tranche at a 6.25 percent fixed interest rate. These 2011 public offerings were completed in March and April 2011, respectively. During the second quarter of 2011, we also entered into a $1.25 billion five-year term loan at a weighted average annual interest rate of 2.05 percent for the period of May 10, 2011 through June 30, 2011, and we terminated the bridge credit facility that we entered into to provide a portion of the financing for the acquisition of Consolidated Thompson. The termination of the bridge credit facility resulted in the realization of $30.4 million and $38.3 million, respectively, of debt issuance cost related to the bridge credit facility during the three and six months ended June 30, 2011. See NOTE 8 DEBT AND CREDIT FACILITIES for further information.

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