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

April 29, 2010 | About:
10qk

10qk

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CLIFFS NATURAL RESOURCES, INC. (CLF) filed Quarterly Report for the period ended 2010-03-31.

Cliffs Natural Resources, Inc. has a market cap of $9.51 billion; its shares were traded at around $70.21 with a P/E ratio of 66.3 and P/S ratio of 4. The dividend yield of Cliffs Natural Resources, Inc. stocks is 0.5%.CLF is in the portfolios of Kenneth Fisher of Fisher Asset Management, LLC, Chuck Royce of Royce& Associates, Stanley Druckenmiller of Duquesne Capital Management, LLC.

Highlight of Business Operations:

Our consolidated revenues for the first three months of 2010 increased to $727.7 million, with net income per diluted share of $0.69. This compares with revenues of $464.8 million and net loss per diluted share of $0.07 for the first three months of 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 three months of 2010 primarily led by demand from China. During the first quarter 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 are 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 quarter 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.

Cost of goods sold and operating expenses in the first quarter of 2010 was $577.7 million, an increase of $155.3 million, or 37 percent over the comparable prior year period. The increase is primarily attributable to higher costs at our North American business operations as a result of higher sales volume, partially offset by lower cost per ton rates due to the impact of higher volume and lower idle expense as a result of higher production levels in 2010 to meet increasing customer demand. Costs were also negatively impacted in the first quarter of 2010 by approximately $40.9 million related to unfavorable foreign exchange rates compared with the first quarter of 2009 and $10.7 million of inventory step-up related to the accounting for the acquisition of the remaining interest Wabush.

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 first quarter of 2010. The favorable unrealized mark-to-market fluctuation of $2.3 million in the first quarter of 2010 relates to the Australian to U.S. dollar spot rate of A$0.92 as of March 31, 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 quarter 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 $151 million at March 31, 2010. During the first quarter of 2010, approximately $42.5 million of outstanding contracts matured, resulting in a cumulative net realized gain of $4.1 million since inception of the contracts. The following table represents our foreign currency derivative contract position as of March 31, 2010:

Equity loss in ventures is primarily comprised of our share of the results from Amapá and AusQuest, for which we have a 30 percent ownership interest in each. The equity loss in ventures for the three months ended March 31, 2010 and 2009 of $3.4 million and $9.2 million, respectively, primarily represents our share of the operating results of our equity method investment in Amapá. Such results consist of operating losses of $2.2 million and $9.1 million for each respective period. The negative operating results in each year are primarily due to slower than anticipated ramp-up of operations and product yields.

attributable to higher demand in the current year as the market continues to strengthen. There has been a recent shift in the industry toward shorter-term pricing arrangements that are linked to the spot market and potential elimination of the annual world pellet pricing mechanism referenced in certain of our supply contracts. We are in the process of assessing the impact a change to the historical annual pricing mechanism will have on our existing customer supply agreements and have recorded certain shipments made in the first quarter of 2010 under such contracts on a provisional basis to reflect the estimated increases in iron ore prices until final settlement is reached on 2010 pricing. Such estimates reflect a 90 percent increase in the price of iron ore pellets in the current year, compared with a settled price decrease in 2009 of 48.3 percent below 2008 prices. As a result, base rate adjustments related to estimated increases in current year pricing have contributed to $58.7 million of higher revenues in the first quarter of 2010. Revenue in the current period also included $19.9 million related to supplemental contract payments compared with a reduction to revenue of $26.9 million in the first quarter of 2009. The increase between periods relates to the estimated rise in average annual hot band steel pricing for one of our North American Iron Ore customers.

Cost of goods sold and operating expenses in the first quarter of 2010 increased $144.5 million or 71 percent from the prior year quarter primarily due to higher sales volume, which resulted in cost increases of $160.8 million. Our cost rate for the quarter improved $7.1 million, principally due to an improved fixed cost leverage associated with higher production at our mines, partially offset by a $10.7 million inventory step-up associated with our acquisition of the remaining interest in Wabush and a $10.2 million unfavorable foreign exchange rate variance. The majority of the step-up recognized in the current quarter was associated with the pelletizing and sale of acquired in-process inventory that occurred in the quarter. As such, the expense will not be recurring at this level in the future. In addition, costs were favorably impacted in the first quarter of 2010 by $19.1 million related to lower idle expense due to increased production as a result of improving market conditions.

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