Cliffs Natural 1Q16 Earnings Call Notes

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Cliffs Natural Resources (CLF) C. Lourenco Goncalves on Q1 2016 Results

We finally saw boards of the major iron ore producers rein in management teams

“I have spent a great deal of time on these quarterly calls explaining that the majors’ stated intention to overproduce iron ore and push iron ore prices down to force their competition out of business was their strategy of self-destruction. Several times I expressed my belief that the Board of Directors of these companies would act to separate their respective companies from the individuals who publicly say that lower iron ore price is something beyond their control and not a consequence of what they do, how they manage their business, and mainly how they communicate their actions to the public. Well, we finally saw the inevitable come to fruition during the past quarter.”

High level departures at BHP and Rio hopefully portend more rationality in production

“We can only hope that these high level departures are indicators that, going forward, the individuals that are now in charge at these majors will show better common sense and will express themselves in public venues in a more responsible manner, one that’s best for their shareholders, very importantly, for their host country, Australia”

The shrinking footprint of US steel is positive for Cliffs

“What’s good for Cliffs is that one steel company suffering the most is not one of our clients, it is U.S. Steel. That has been a real positive for Cliffs’ well established long-term customers. What’s good for Cliffs’ customers is good for Cliffs. And the shrinking steel footprint of U.S. Steel is actually an overall positive for Cliffs. I will be glad to explore this issue during the Q&A portion of the call.”

I’m a shareholder and everything I do will be to protect shareholders

“Look, Nick, I am a larger shareholder, every single action that I have taken in this company here since August 7, 2014 was to protect the shareholders. I will continue to do so. Everything I will do going forward will be exactly like everything I have done so far, to protect the shareholders”

This business is not about cash production costs, it’s about cost and value in use

” price will not go below $45 because below $45, the majors get crazy. The majors who start to try to stretch payables, things like that. Because it’s not about – this business, Tony, is not about cash production cost per ton, this business is about cost and value in use. Cost per ton is just a metric. You produce for a demand that doesn’t exist, you are going to get hurt. You have to carry a terrible, horrible, tremendous overhead.”

Goncalves is still crazy

Analyst: Yes, hi, Lourenco. My question was answered already.
C. Lourenco Goncalves – Chairman, President & Chief Executive Officer: But mine was not, what’s the current price expectation of the desk of JPMorgan for iron ore, Mike?
Analyst: Well, let me just say they’re below your expectations. I realize that our commodity team (44:59).
C. Lourenco Goncalves – Chairman, President & Chief Executive Officer: When are you guys going to fire these guys at the desk; they are making your company look ugly.”

China will have to decide whether they will be a superpower or a rogue country

“the problem in China right now is how China will position themselves to continue to behave as a superpower and not to behave like a rogue country. China is in a very decisive moment. Are they going to be part of the developing world or they are going to continue to be something very big but very bothering (46:57) for everyone else. And I believe that I know the answer. I believe that China will be a superpower, will be a first world country.”

Iron ore is not a typical commodity

“The problem is not the Dalian Commodity Exchange, the problem is not the behavior of the Chinese. The problem is the fact that iron ore is not pork bellies, iron ore is not soybeans, iron ore is not gold, iron ore is not a commodity like any other commodity, iron ore is a controlled commodity. There are three companies that control everything in the iron ore business, and four companies that, together, have 84% of the market. BHP, Rio Tinto, Fortescue and Vale. So it only takes one of this four or two of this four to say, enough is enough, or to start charging a premium over IODEX, or even say, you know what, my friends, Chinese, I’m not going to use your Dalian Commodity Exchange index anymore as my reference. You want to buy my iron ore, you’re going to have to negotiate with me one on one. It was like that before.”

There are four companies in iron ore that control everything

” there are four companies in the iron ore world that they can change everything, if they change their bad behavior in terms of pretending that they don’t have pricing power. They do have pricing power. These commodities are controlled commodities. Prices go up and down because of BHP, because of Rio Tinto and because of Vale. They can deny this as long as they want, but every time their stock price is in the trash can, they change their behavior. Every time their executives speak out of school (52:14), one is fired. So if the new guy that took over, over there, if they continue their speech, they will be next. “