Cliffs Natural Resources 1Q15 Earnings Call Notes

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The big three majors cannot support their CapEx without allowing iron ore prices to increase

none of the three majors can continue to support their massive CapEx needs without allowing iron ore price to increase and if they still decide to keep iron ore prices artificially low as they had been doing so far, they are advertized massive capacity increases will not materialize due to insufficient cash flow generation.”

The problem for iron ore is that the big three companies continue to say that they are going to expand

“People talk a lot about the world being flooded with iron ore. That is a true statement that at this point, but the biggest problem for iron ore price at this point is not even the fact that the world is being flooded with iron ore. It is the fact that the market and the press and the investors are being flooded with that information about the expansion plan of three companies and these three companies are Rio Tinto, BHP and Vale.”

Iron ore companies are saying they’re going to add a huge amount of production

” we will have for example just to give you a good number, easy one to understand, you have Vale saying, we produced 310 million tons a year, but I am going to 460, so that is another 40 SKU on top of what they have right now.

You have currently Rio Tinto producing something like 250 million tons, but saying that they are going to produce 360. That is two Roy Hills on top of the existing production. You have Roy Hill producing nothing, because Roy Hill – they are just the landlord of Rio Tinto, but saying that starting September, we are going we are going to add 55 billion tons to the trade, so these news are the ones that are destroying the future view of iron ore sinter feed fines in the world, but we have to see this thing in the contest of how these things are being played.”

They are trying to scare everyone else

“Rio Tinto and BHP more Rio Tinto than BHP, they are playing the game of scaring everybody else, and some people are getting really scared, some others are not. Some others are acting. I put myself in Cliffs, in the side of the one that take these things as face value that’s it is what it is, so this important marketing is doomed, is cursed a place not to be in. I can’t wait to get out of Australia. That is the bottom-line, because I already shutdown completely in Canada and soon as soon as I get to the end of life of mine in Australia, I am out of here.”

They don’t have the money for these projects

“Another point to consider is that there is not enough CapEx for these guys to do what they are doing other than current cash flow generation. I really would like to see analysis on that, where is the money coming from for the massive deployment that’s necessary for BHP, Rio Tinto and Vale.

Serra Sul, the S11D project alone, we are talking of something like $20 billion. The do not have that money, period, full stop. They are scrambling to make [ph] right now at Vale. I am a Brazilian guy as you know. I know what’s going on there, a lot more than they believe, so they can talk a good gain, but the reality is completely different.”

These big projects are not coming

“Long story short these big projects are not coming”

I have no idea how long it will take for people to realize what’s going on

“How long it will take for everyone to perceive the game, I do not know. I am in the business of clarifying that as much as I can, because it is affecting me. I could care less about that, but it is affecting Cliffs. We are having to reduce our footprint in Australia, because of that. I know that the Western Australian government is not happy with the way they are handling their natural resources over there, so there is a lot going on and a lot can change between now and then in next year for example.”

This company has a good management team, the board was just messed up

My biggest surprise when I got to Cliffs is that this company has a very, very strong management team. It is amazing how badly the board was handling this company. This has been fixed. It was fixed nine months ago since then we have been working hard and we will continue to work.”

Oh, Nathan, one more thing…about your model…

“Nathan, before you go, just a reminder, you have an EBITDA target for Cliffs Natural Resource for the year of $170 million. In Q1 alone and Q1 is the frozen quarter, is the quarter that we are not shipping, because you can walk between here and your home country in Canada, you know that.”

“Even with this difficulties, we are able to generate $94 million reasonable in Q1, so now based on your EBITDA target, I am $76 million away from reaching your EBITDA target and I have three quarters to do it just a reminder.”

Oh ya, and look at your price target too…

“Take a look at your price target as well, because you went from 10 to 1, baked into your report the assumption that Cliffs Natural Resource by now would be would be bankrupt, so you were wrong. I am not bankrupt, I am not heading to bankruptcy. Your assumptions are all wrong and the outcome has been bad so far.”

I believe that what the big three are doing is on purpose

“I believe that what they are doing is on purpose and I believe that what they are doing is not right and I believe that they are generating a lot of unemployment in Australia and that should have serious consequence for the years to come.”

If this were LIBOR these people would be going to jail

“It is tactics of scaring everyone else, it is a tactics that plays well for the future markets they are base on the IODEX and that is manipulation of an index. If it were the LIBOR, people would go to jail, but because it is IODEX, people do not go to jail, but shareholders that realize what is going on they may take action and that is what I am talking about, so when are they going to be rational, when they get scared when are they going to get scared, I do not know.”

Board members are a lot more responsible than CEOs

“They are basically terrorizing the market with the prospect of CapEx that at the end of the day will not be deployed. Do you know why they will not be deployed, because board members are a lot more responsible than CEOs, they are not bullish, they have fiduciary duties and they are responsible for what actions they take, if they do, they will responsible.”