Stronger pricing and volumes helped mining company, Cliffs Natural Resources Inc., (CLF) post record revenues and earnings in the third quarter of 2010. Net earnings of $297.4 million or $2.18 per share in the third quarter were an over four-fold increase from last year’s $58.8 million or 45 cents. However, earnings missed the Zacks Consensus Estimate of $2.59 per share.

Quarterly revenues more than doubled to $1.3 billion from $666.4 million in the year-ago period on higher pricing and improved sales volumes across all businesses, especially in North America, driven by improving demand from steel makers. However, revenues were below the Zacks Consensus Estimate of $1.5 billion.

Segment Performance

North American Iron Ore: Revenues from the segment climbed 34% year over year to $105.07 per ton on higher seaborne iron ore prices and hot band steel prices. Additionally, Cliffs revised its initial estimate to fit in with the increase in seaborne iron ore pellet price from an average increase of 90% to about 96% over the 2009 settlement price, which also triggered revenue growth.

Sales volumes jumped 37% to 7.6 million tons on higher demand for iron ore pellets. Higher demand was attributable to the North American steel industry capacity utilization, which improved to around 70% in the third quarter 2010 from 49% – 59% in the third quarter of 2009.

Cost per ton in the segment inched up 7% to $66.92 from $62.28 in the year-ago quarter due to higher royalties, offset by lower energy-related costs and idle expenses.

North American Coal: Revenues jumped 22% year over year to $117.64 per ton in the third quarter of 2009 while adjusted costs declined 17% to $117 per ton. North American Coal sales volume increased by a whopping 185% to 977,000 tons driven by additional sales from the recent acquisition of INR Energy’s coal operations.

A 52% increase in sales volume was driven by Cliffs’ legacy coal assets. However, Cliffs’ Pinnacle and Oak Grove mines both experienced adverse geological conditions, which led to poor production volumes and lower than expected third-quarter sales.

Asia-Pacific Iron Ore: Third-quarter 2010 Asia Pacific Iron Ore sales volume was up 12% to 2.3 million tons. Revenue per ton in Asia-Pacific Iron Ore more than doubled to $128.09, compared with $62.71 in 2009 on higher prices in the seaborne market. Cost of goods sold increased 5% to $55.20 per ton in the third quarter.

During the third quarter, Cliffs raised $1 billion in debt, which it plans to use for offloading other borrowings. As of September 30, 2010, long-term debt totaled to $1.7 billion compared with $525 million as of December 2009. Cash and cash equivalent amounted to $969.4 million as of September 30, 2010, higher than $502.7 million as of December 2009.

Outlook

Cliffs expects steady demand for the rest of 2010 and into 2011 with steel utilization rates remaining stable. Below is the company’s guidance for each of its business segments.

North American Iron Ore Outlook

Cliffs expects North American Iron Ore sales volume of about 27 million tons in 2010. Revenue has been estimated at about $98 – $103 per ton, down from the previous expectation of $107 – $112. Cliffs expects production of about 26 million tons in 2010.

Cost-per-ton is expected at $65 – $70. Cliffs’ has fixed a final pricing for about 60% of its 2010 expected sales volume. Under the supply agreements, final pricing is based on an average iron ore settlement price increase of 96% over the 2009 seaborne price. In 2011, Cliffs expects to produce and sell about 27 million tons from its North American Iron Ore business.

North American Coal Outlook

Cliffs has slashed its 2010 North American Coal sales and production volume expectation to 3.6 million tons from its prior expectation of 3.9 million tons due to continued adverse geological conditions experienced at its legacy mines. The product split is expected to be 500,000 tons of thermal coal and 3.1 million tons of metallurgical coal.

Full-year revenues are expected at $115 – $120 per ton. Cost-per-ton is likely to rise to $120 – $125 from the initial guidance of $115 – $120. In 2011, Cliffs expects to produce and sell about 6.5 million tons from its North American Coal business, including 5.5 million tons of metallurgical coal and 1.0 million tons of thermal coal.

Asia Pacific Iron Ore Outlook

Cliffs raised its 2010 Asia-Pacific Iron Ore sales and production volume forecasts to 9 million tons on higher production from its Cockatoo Island joint venture in Western Australia. Cliffs expects higher 2010 revenue at its Asia Pacific Iron Ore, near about of $115 – $120 per ton, up from $110 – $115. Costs are expected to be $55 – $60 per ton, unchanged from previous guidance. In 2011, Cliffs expects to produce and sell about 9.0 million tons from its Asia Pacific Iron Ore business.

Although Cliffs posted stronger third quarter results, it fell short of the Zacks Consensus Estimates, both on the earnings and revenues front. Analysts and investors were bearish on the stock since it missed its second quarter consensus estimate. Similar apprehensions of missing the consensus estimate drives the short-term (1 to 3 months) Zacks #4 Rank (Sell).

 
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