Stronger pricing and volumes helped mining company, Cliffs Natural Resources Inc., (CLF) to post record revenues and earnings in the fourth quarter of 2010. Net earnings of $384.3 million or $2.82 per share in the fourth quarter were 225%, above last year’s $108.1 million or 82 cents. Earnings surpassed the Zacks Consensus Estimate of $2.16 per share.

Quarterly revenues came in at $1.4 billion, in line with the Zacks consensus Estimate and up 74% year over year. This was primarily attributable to higher sales volume and pricing due to greater exposure to seaborne markets and higher global demand for steelmaking raw materials.

During the reported quarter, Cliffs’ consolidated sales margin increased 175% year over year to $482 million, resulting from increased sales volumes and higher year-over-year pricing in each of the company’s business segments.

Operating income in the quarter increased 155% year over year to $397 million.

In fiscal 2010, total revenue more than doubled to $4.7 billion from $2.3 billion in the year-ago period. In fiscal 2011, net income was $1,019.7 million or $7.49 versus $204.3 million or $1.63 in the prior year.

Segment Performance

North American Iron Ore: Revenues from the segment climbed 33.5% year over year to $107.38 per ton on higher seaborne iron ore prices and hot band steel prices.

Sales volumes jumped 14% 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 fourth quarter of 2010 compared with a lower utilization rate of nearly 60% in the fourth quarter of 2009.

Cost per ton in the segment climbed 22% to $67.66 from $55.24 in the year-ago quarter due to higher royalties, offset by lower energy-related costs and idle expenses.

North American Coal: Revenues jumped 29% year over year to $116.83 per ton in the fourth quarter of 2010. Adjusted costs jumped 39% to $141.85 per ton. North American Coal sales volume increased 24% to 927,000 tons, driven by 615,000 tons of incremental sales volume from the coal operations of INR Energy, which were acquired in mid-2010. Cost per ton at both Pinnacle and Oak Grove mines was negatively impacted by the low production yields, given adverse geological conditions experienced at both mines during the quarter, offset by lower per-ton costs at the recently acquired coal operations of INR Energy.

Asia-Pacific Iron Ore: Asia Pacific Iron Ore sales volume was up 24% to 2.6 million tons in the fourth quarter of 2010. Revenue per ton in Asia-Pacific Iron Ore more than doubled to $135.47 compared with $64.45 in 2009 on higher prices in the seaborne market. Cost of goods sold increased 19% to $65.74 per ton in the fourth quarter.

Financial Position

At the end of December 31, 2010, cash and cash equivalents, with no borrowings drawn on its $600 million revolving credit facility, excluding letters of credit was $1.6 billion.

In fiscal 2010, cash from operations was more than $1.3 billion. Cliffs did not receive the previously disclosed settlement payment of $129 million related to the arbitration resolution with one of its North American Iron Ore customers until January 6, 2011.  As such, this payment was not reflected in Cliffs’ 2010 cash from operations or in cash and cash equivalents as of December 31, 2010.

At the end of December 31, 2010, Cliffs had $1.7 billion in long-term borrowings, comprising $325 million in private placement senior notes and $1.4 billion in public senior notes. The company indicated that the majority of the long-term borrowings will mature in 2020 and beyond. Depreciation, depletion and amortization for full-year 2010 were $322 million.

SonomaCoal and the Amapa Iron Ore Project

In the fourth quarter of 2010, Cliffs’ share of sales volume for its 45% economic interest in Sonoma Coal was 500,000 tons. Revenues and sales margin generated $69 million and $22.9 million, respectively. Revenue per ton was $137.90, with costs of $92.19 per ton. 

Cliffs has a 30% ownership interest in the Amapa Iron Ore Project. During the quarter, Amapa produced a total of 1.2 million tons and earned equity income of $5.6 million.

Outlook

Cliffs anticipates that global steel production will continue to grow in 2011, primarily driven by emerging economies such as China, India and Brazil.

Subsequent to year end, Cliffs announced it had entered into a definitive agreement with Consolidated Thompson Iron Mines Limited to acquire all of its shares outstanding in an all-cash transaction valued at approximately $4.9 billion (including net debt). In addition, Cliffs entered into a support agreement with Consolidated Thompson’s largest shareholder, Wuhan Iron and Steel (Group) Corporation of China, along with the directors and certain senior officers of Consolidated Thompson. This transaction is expected to close in early second quarter of 2011, subject to the satisfaction or waiver of various closing conditions.

For fiscal 2011, Cliffs expects its equity sales and production volume at Sonoma Coal to be 1.6 million tons. The approximate product mix is expected to be two-third of thermal coal and one-third of metallurgical coal. Cliffs expects per-ton costs to be $105 – $110, primarily driven by higher royalties and an unfavorable exchange rate variance. Cliffs expects the Amapa Iron Ore Project to be modestly profitable in 2011.

SG&A expenses are anticipated to be approximately $200 million in 2011. The company anticipates an effective tax rate of approximately 30% for the year and depreciation, depletion and amortization of approximately $360 million.

Cliffs expects to generate more than $2.7 billion in cash from operations in 2011. The company expects capital expenditures of approximately $700 million, comprising approximately $300 million in sustaining capital and approximately $400 million in growth and expansion, including the following projects within Cliffs’ business segments:

North American Iron Ore Outlook

For first-quarter 2011, Cliffs expects North American Iron Ore sales volume of about 28 million tons. Revenue has been estimated at about $140 – $145 per ton. The U.S. blast furnace utilization is expected to be approximately 70% in 2011. Average hot rolled steel pricing is expected to be $650 – $700, settled annual pellet to increase 35% from 2010’s pricing and $300 million associated with the pending arbitration. Cliffs expects its North American Iron Ore 2011 production volume to be approximately 28 million tons. At this production level, the company anticipates its cost per ton to be $65 – $70, with approximately $5 per ton, including depreciation, depletion and amortization.

For fiscal 2011, Cliffs expects $125 million related to the previously disclosed extension of Cliffs’ Empire Mine in Michigan to 2014 and $20 million related to increasing production at Wabush to 5.5 million tons by 2013

North American Coal Outlook

As per Cliffs, it is maintaining its 2011 North American Coal sales and production volumes expectation of approximately 6.5 million tons, comprising 1 million tons of thermal coal, 1.5 million tons of high-volatile metallurgical coal and 4 million tons of low-volatile metallurgical coal.

Cliffs’ North American Coal revenue-per-ton in 2011 is expected to be $135 –$140.

In 2011, Cliffs anticipates cost per ton for the year to be approximately $105 – $110, with approximately $15 per ton, including depreciation, depletion and amortization.

In 2011, Cliffs anticipates $146 million related to the previously disclosed infrastructure upgrades at Cliffs’ Koolyanobbing Mine in Western Australia.

Asia Pacific Iron Ore Outlook

Asia Pacific Iron Ore 2011 sales and production volumes are expected to be 9 million tons. Cliffs’ 2011 Asia Pacific Iron Ore revenue-per-ton expectation is $175 – $180. Costs per ton are expected to be approximately $70 – $75. The year-over-year increase in the average cost expectation is primarily driven by higher royalties, higher stripping costs and a less favorable foreign exchange rate. Depreciation, depletion and amortization costs per ton are expected to be $12.

We maintain our Neutral recommendation on Cliff with a short-term Zacks  #3 Rank (Hold).

 
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